How much you can borrow
Generally, three factors will affect the amount you can borrow:
- The value of your equity (the higher the better).
- Your age (the older the better).
- Interest rates (the lower the better).
Here are some hypothetical examples of how it can work:
- Julia is a 72-year-old who wishes to sell the home, worth $450,000, she owns free and clear in Ohio and wishes to downsize to a smaller home in Florida for $185,000, to be closer to her children and grandchildren. She decides to use the HECM for Purchase Program to buy her new home and will have more money leftover than if she used a straight purchase transaction. After she sells the house in Ohio, she can buy the Florida home using a $116,000 reverse mortgage and $69,000 cash. Now she owns the house in Florida and does not have to make any mortgage payment and has the $381,000 remaining from the sale of the Ohio home to invest, giving her extra income.
- Richard and his wife, both 75 years old, wish to move from their home in Georgia to a new home in New Mexico. Richard is concerned he won't get a fair market price for his home because of declining home prices and wants to wait until prices rebound. They decide to use a HECM for Purchase Program reverse mortgage to buy the new home and retain the old home. This way they will not have to make mortgage payments on the new property, for which they paid $185,000. They also plan to rent out their current home as a way to generate additional income. They qualify for $116,000 reverse on the new property in New Mexico, so they pay the $69,000 difference from existing cash assets.
An additional benefit to the "for purchase program" is that you can't outlive the loan because you can never owe more than the value of the home at the time you or your heirs sell the home. When you sell the home, you or your estate will repay the cash you received from the reverse mortgage plus interest and other fees to the lender. Any remaining equity belongs to you or your heirs.
These government-backed "for purchase" reverse mortgages are "no-recourse" loans, meaning if the borrower defaults, the lender's recovery is limited to the sale value of the house. For example, if real estate values have declined at the time the loan comes due, and the home no longer is worth as much as the amount loaned, the FHA pays the lender the amount of the shortfall.
HUD recently clarified that the borrower cannot choose between paying the loan balance or paying an amount equal to the value of the home. Instead, when the loan is due, the borrower must either pay the balance due or default on the loan, in which case the bank sells the house and uses the proceeds to satisfy the loan.
However, even if that happens, you or your heirs will never owe more than the value of the home.
HECM loans are available only through an FHA-approved lender.
There are numerous calculators on such sites as AARP and Golden Gateway Financial that can help you determine which reverse mortgage is best for you.
Further information, including a list of FHA-approved lenders, is available free from the FHA.
One added cost to a reverse mortgage is an extra insurance premium, usually more than a conventional mortgage, which has to be paid by the homeowner to insure the lender against the possibility the homeowner lives longer than anticipated, says Bachman.
The insurance guarantees you will never pay more than a stated amount despite increased borrowing costs over time. More than 90 percent of all reverse mortgages in the United States are also HECM loans insured by the federal government through HUD. The insurance applies to the FHA mortgages. This insurance is what makes a reverse mortgage more expensive than a conventional or straightforward mortgage.
On a positive note, interest rates on reverse mortgages today are similar to conventional mortgages. In addition, fees associated with a reverse mortgage cannot exceed 2 percent of the first $200,000 and 1 percent of the balance, with a maximum of $6,000.
There's another potential upside to having a reverse mortgage. "If the house appreciates in value, you benefit from the appreciation and can refinance the reverse mortgage for a higher amount and benefit from a larger revenue stream," Bachman says.