Good idea to finance home with reverse mortgage?


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Dear Senior Living Adviser,
I was contacted about a reverse mortgage purchase. What are the pitfalls and the positives with a HECM (or, home equity conversion mortgage) through FHA (Federal Housing Authority)? What are the fees involved there? We’re looking at buying a $225,000 home and putting 50% down.

We are both 77 and want to know if this would be a positive thing for us, figuring that we are in the home for the next 12-15 years. We are both in good health.
— Barbara Bungalow

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Dear Barbara,
The FHA has a HECM for purchase program that allows seniors to buy a new home with about a 50% down payment, with the rest of the cost of the home being financed with the HECM.

There’s no monthly mortgage payment. At age 77, you’re both over the minimum age of 62 for a HECM borrower. The U.S. Housing and Urban Development webpage, “FHA Reverse Mortgages (HECMs) for Seniors” provides a good overview of the HECM loan program. I’ve presented some of the information below.

Calculating the loan size

The size of the loan available is based on the age of the borrowers, current interest rates, and the lesser of the home’s appraised value, the HECM FHA mortgage limit of $625,500 or the sale price.

The reverse mortgage comes with several fees and charges, which include mortgage insurance premiums — initial and annual, third-party charges, origination fees and interest, and servicing fees.

You will be charged an initial mortgage insurance premium at closing. The initial mortgage insurance premium will be either 0.5% or 2.5%, depending on your disbursements.

Over the life of the loan, you will be charged an annual mortgage insurance premium that equals 1.25% of the outstanding mortgage balance.

Closing costs can include an appraisal, title search, title insurance, surveys, inspections, recording fees, mortgage taxes, credit checks and other fees.

Loan origination fees

There’s also a loan origination fee. The lender can charge the greater of $2,500 or 2% of the first $200,000 of your home’s value plus 1% of the amount over $200,000. HECM loan origination fees are capped at $6,000.

Lenders or their agents provide servicing throughout the life of the reverse mortgage. Servicing includes sending you account statements, disbursing loan proceeds and making certain that you keep up with loan requirements such as paying real estate taxes and hazard insurance premium.

Lenders may charge a monthly servicing fee of no more than $30, if the loan has an annually adjusting interest rate or has a fixed interest rate. The lender may charge a monthly servicing fee of no more than $35 if the interest rate adjusts monthly.

Before you can take out a HECM loan, there is mandatory counseling session to help you better understand how these loans works. Make sure you’re comfortable with the decision to use the loan to finance your retirement home.

Ask the adviser

To ask a question of Dr. Don, go to the “Ask the Experts” page and select one of these topics: “Senior Living,” “Financing a home,” “Saving & Investing” or “Money.” Read more Dr. Don columns for additional personal finance advice.

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