Mountain Mortgage: Reverse mortgage programs undergoing changes (column)
Reverse mortgages (or, as they are technically called, home equity conversion mortgages) have been around since the 1980s and can be very powerful financial tools for those older than 62. The Federal Housing Administration provides virtually all of these mortgages, and over the years, the program has had numerous tweaks.
It is really only in the past five years or so that aging baby boomers started to grasp the power of this tool in planning to age gracefully and stay in their homes as long as possible. The program is about to receive a major tweak in October, and if you have been toying with the idea of getting one, listen up and act fast.
what conversion mortgages are
The way a home equity conversion mortgage works is the homeowner must have substantial equity (generally more than 50 percent of value) in his or her home, and the maximum loan amount (this month) works out to about $350,000, regardless of what the home is worth or what is owed.
The proceeds of the home equity conversion mortgage first go to pay off the existing mortgage (if there is one), and if there is cash left over between the payoff and closing costs, then the homeowner can choose either a lump sum cash payment, a line of credit to draw on or a monthly stipend. If there is more owed than the maximum loan amount, then the borrower must pay down the existing loan at the time of closing.
The maximum loan amount is heavily dependent upon the age of the youngest borrower, and the older you are, the more you can borrow. The borrower then must pay the taxes, insurance and maintain the home but never has a mortgage payment. The borrower retains title to the home and cannot lose it, as long as they do not default on their obligations otherwise, declare bankruptcy or incur income tax liens or other judgments.
The maximum loan amount is far below the appraised value of the home because the lender must assume that hundreds of thousands of dollars of interest might accrue over the years and long-term appreciation is never a given.
The interest on the loan accrues to the initial loan balance, and when the borrower sells the home or no longer lives there for 12 consecutive months, the loan and accrued interest is due. If the borrower has lived there for decades and there is no equity left in the house, then they (or their estate) simply sign over the home to Federal Housing Administration and walk away. If there is equity, then it is just like a normal sale and the homeowner or his estate get a check for what equity is left.
what is changing
But starting Oct. 2, the Federal Housing Administration is changing the formulas for how much a borrower can borrow and tinkering with the closing costs and mortgage insurance. Overall, the exact impact is not known yet, but industry expectations are homeowners will be able to borrow far less and it will cost them far more. As such, there is a mad dash to get in line and go under the current rules.
To make it by Oct. 2, a borrower must first complete a two-hour online course on how a home equity conversion mortgage works to be sure this is a good fit for him or her. After that is done, he or she must submit a loan application to a home equity conversion mortgage lender and the lender will secure a case number for the file. The file can close after Oct. 2, but the case number must be issued before then.
So realistically, if you want a reverse mortgage, then get moving now. There is not a moment to waste.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related questions from readers. His website and blog can be found at http://www.mtnmortgageguy.com.
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