Senior Housing Guide | Guide to Reverse Mortgages | Total Mortgage

Senior Housing Guide

Throughout your life, housing and mortgage options have been a vital part of your financial plan. While approaching your senior years and the fixed-income stages may add additional stress to financial considerations, you should know that you have options. There is no reason for you to feel overwhelmed or helpless. Often, the implications of new physical, medical, and mental limitations cause people to make quick and uninformed decisions. And unfortunately, there are people who take advantage of others whom they perceive as vulnerable. Doing your research before any transaction is crucial. Read about your options in this guide and then, ask around. Questioning family and friends may be a start, but ultimately before you make any major financial decisions, you should sit down with a professional. Have the professional look at your financial situation and be honest about where you see yourself in the next few years. Risky financial behavior is harder to recover from as you age. Open communication with relatives and a financial advisor can greatly reduce your risk.

Reverse Mortgages

What is a Reverse Mortgage?

A reverse mortgage is a loan wherein the lender makes payment to you instead of you paying the lender. The loan is not due as long as the borrower lives in the home. You pay the lender back when the borrower moves out of the home, dies, or sells the home.

It is important to know that a spouse living in the home who is not named on the loan will be required to pay the loan in the event the borrower dies or can no longer live in the home.

Reverse mortgages allow seniors to pull money out of their home’s equity without selling their home. You lose equity in your home when you take out a reverse mortgage. When you originally bought your home, you probably took out a forward mortgage. You paid a down payment and borrowed the rest. You slowly gained equity as you paid the mortgage. In a reverse mortgage, you have equity in your home. As you take payments from the lender, you lose equity. The one exception to this is if your home value increases steadily at high rates. But this doesn’t normally occur. Usually, if you take out a reverse mortgage, you should expect to lose some equity.

Who is Eligible?

Anyone over the age of 62 with equity in the home they use as their primary residence.

How Do Reverse Mortgages Pay Out?

One thing to consider before deciding on a reverse mortgage is how you would like to receive your money. Depending on what type of reverse mortgage you select, you may have options on how you are paid out. Reverse mortgages pay out in one of the following ways:

  • Tenure — As long as one borrower lives in the house, the borrower receives equal monthly payments.
  • Line of Credit — The borrower chooses to receive money at different times and amounts until the line of credit runs out.
  • Term — Similar to a tenure structure, except payments are received for a fixed period of time.
  • Modified Tenure — Borrower receives a mix of a line of credit and scheduled payments as long as the borrower stays in the home.
  • Modified Term — Similar to a modified tenure, except monthly payments are received for a fixed period of time.
  • Lump Sum Payments — One-time cash payments.

Types of Reverse Mortgages

Single Purpose Reverse Mortgages are given by nonprofits and local and state governments. As the name implies, they are used for single purposes. Usually, they are used for necessary repairs or property taxes. Borrowers utilizing these loans usually meet low or moderate income requirements.

Home Equity Conversion Mortgages, or HECMs, are loans backed by HUD that allow you to borrow against the equity in your home. These mortgages are pricier than traditional home loans and can carry high upfront costs. Because of these costs, seniors who use these loans should intend to stay in their homes for many years. One advantage to these loans is there are few limitations on them. Unlike single purpose reverse mortgages, the money can be used for any reason and they are free from medical or income limits. The amount available to seniors varies depending on the borrower’s age (generally, the amount of money available to you increases as you age), the appraised value of your home, current interest rates, the amount of equity in your home, and the type of reverse mortgage. Other advantages of HECMs include: they are nontaxable, they don’t affect Social Security or Medicare, and the borrower can live in assisted living for up to a year before repaying the loan.

Things you need to know about acquiring an HECM:

  • All those looking to obtain an HECM must speak to a HUD counselor before applying for the loan.
  • Borrowers remain responsible for property taxes, maintenance, and homeowner’s insurance.
  • Fees associated with HECM are a loan origination fee, FHA Mortgage Insurance premiums, servicing fees, interest, and third-party fees (appraisers, inspectors, title policies, etc).
  • The maximum amount loaned on HECM is $625,000.

Standard vs. Saver HECMs: Saver HECMs are ideal for smaller loans. While all HECMs require mortgage insurance, under the Saver program loans range from 10 to 18 percent less than Standard HECMs. Standard HECMs carry an upfront premium of 2% while Savers have only .01 percent. The mortgage insurance premium, or MIP, for both Savers and Standards is a monthly charge of 1.25% of the remaining loan.

Proprietary Reverse Mortgages—Also known as Jumbo Reverse Mortgage loans, proprietary reverse mortgages are private loans from companies. They are generally used to borrow greater sums of money for larger properties. Most proprietary loans are $750,000 or more. Interest rates and fees in proprietary reverse mortgages tend to be higher than in the other types of reverse mortgages. Due to declining home values, a limited secondary market, and perceived risks in the banking industry, the number of these loans has decreased significantly over the past few years. People seeking this type of reverse mortgage may have difficulty finding the funding. Although it is recommended, not all states require counseling to obtain a proprietary mortgage.

Back to Top

Reverse Mortgages

What is a Reverse Mortgage?

A reverse mortgage is a loan wherein the lender makes payment to you instead of you paying the lender. The loan is not due as long as the borrower lives in the home. You pay the lender back when the borrower moves out of the home, dies, or sells the home.

It is important to know that a spouse living in the home who is not named on the loan will be required to pay the loan in the event the borrower dies or can no longer live in the home.

Reverse mortgages allow seniors to pull money out of their home’s equity without selling their home. You lose equity in your home when you take out a reverse mortgage. When you originally bought your home, you probably took out a forward mortgage. You paid a down payment and borrowed the rest. You slowly gained equity as you paid the mortgage. In a reverse mortgage, you have equity in your home. As you take payments from the lender, you lose equity. The one exception to this is if your home value increases steadily at high rates. But this doesn’t normally occur. Usually, if you take out a reverse mortgage, you should expect to lose some equity.

Who is Eligible?

Anyone over the age of 62 with equity in the home they use as their primary residence.

How Do Reverse Mortgages Pay Out?

One thing to consider before deciding on a reverse mortgage is how you would like to receive your money. Depending on what type of reverse mortgage you select, you may have options on how you are paid out. Reverse mortgages pay out in one of the following ways:

  • Tenure — As long as one borrower lives in the house, the borrower receives equal monthly payments.
  • Line of Credit — The borrower chooses to receive money at different times and amounts until the line of credit runs out.
  • Term — Similar to a tenure structure, except payments are received for a fixed period of time.
  • Modified Tenure — Borrower receives a mix of a line of credit and scheduled payments as long as the borrower stays in the home.
  • Modified Term — Similar to a modified tenure, except monthly payments are received for a fixed period of time.
  • Lump Sum Payments — One-time cash payments.

Types of Reverse Mortgages

Single Purpose Reverse Mortgages are given by nonprofits and local and state governments. As the name implies, they are used for single purposes. Usually, they are used for necessary repairs or property taxes. Borrowers utilizing these loans usually meet low or moderate income requirements.

Home Equity Conversion Mortgages, or HECMs, are loans backed by HUD that allow you to borrow against the equity in your home. These mortgages are pricier than traditional home loans and can carry high upfront costs. Because of these costs, seniors who use these loans should intend to stay in their homes for many years. One advantage to these loans is there are few limitations on them. Unlike single purpose reverse mortgages, the money can be used for any reason and they are free from medical or income limits. The amount available to seniors varies depending on the borrower’s age (generally, the amount of money available to you increases as you age), the appraised value of your home, current interest rates, the amount of equity in your home, and the type of reverse mortgage. Other advantages of HECMs include: they are nontaxable, they don’t affect Social Security or Medicare, and the borrower can live in assisted living for up to a year before repaying the loan.

Things you need to know about acquiring an HECM:

  • All those looking to obtain an HECM must speak to a HUD counselor before applying for the loan.
  • Borrowers remain responsible for property taxes, maintenance, and homeowner’s insurance.
  • Fees associated with HECM are a loan origination fee, FHA Mortgage Insurance premiums, servicing fees, interest, and third-party fees (appraisers, inspectors, title policies, etc).
  • The maximum amount loaned on HECM is $625,000.

Standard vs. Saver HECMs: Saver HECMs are ideal for smaller loans. While all HECMs require mortgage insurance, under the Saver program loans range from 10 to 18 percent less than Standard HECMs. Standard HECMs carry an upfront premium of 2% while Savers have only .01 percent. The mortgage insurance premium, or MIP, for both Savers and Standards is a monthly charge of 1.25% of the remaining loan.

Proprietary Reverse Mortgages—Also known as Jumbo Reverse Mortgage loans, proprietary reverse mortgages are private loans from companies. They are generally used to borrow greater sums of money for larger properties. Most proprietary loans are $750,000 or more. Interest rates and fees in proprietary reverse mortgages tend to be higher than in the other types of reverse mortgages. Due to declining home values, a limited secondary market, and perceived risks in the banking industry, the number of these loans has decreased significantly over the past few years. People seeking this type of reverse mortgage may have difficulty finding the funding. Although it is recommended, not all states require counseling to obtain a proprietary mortgage.

Back to Top

HECM for Purchase Loans

While many seniors find the need to downsize as they get older, they still want to be homeowners. A new mortgage on a fixed income may be intimidating. HECM gives these seniors an opportunity to buy a new home without acquiring new mortgage payments.

Before HECM allowed seniors to buy with a reverse mortgage, buyers would take out a mortgage for the new home. Then, the buyer would take out a reverse mortgage to pay that mortgage. Seniors with low incomes or poor credit could be restricted from getting the traditional mortgage, and those that did were forced to pay closing costs on the traditional mortgage and the reverse mortgage.

The HECM for Purchase program was enacted in 2008 and eliminated the middle step and the extra closing costs. The main stipulations for buying a home with the HECM for Purchase program are:

  • It can only be used for the purchase of an existing house and not for new construction.
  • The borrower must use the property as their physical residence within 60 days of purchase.
  • The buyer must pay the difference between the total of the settlement costs and the purchase price minus the HECM maximum loan amount.

The rules for this type of HECM are the same as in other HECM reverse mortgages. Seniors can choose from Standard or Saver versions. Fixed-rate and adjustable rates are available.

The other option for those who want to buy a new home is to purchase the home with cash and then take out an HECM reverse mortgage. This allows the buyer to purchase new construction. While many don’t have the option of paying all cash, some find that selling off assets may help. Some assets can be re-acquired with the money from the reverse mortgage. However, using retirement accounts to pay for a new home and then, taking out a reverse mortgage is almost never advisable.

The loan becomes due when the borrower no longer uses the home as their primary residence. A spouse living in the home who is not named on the loan will be required to pay back the loan in the event that the borrower dies or moves out.

 

8 Things to Consider Before Taking Out a Reverse Mortgage

 

  1. Be cautious of sales people using reverse mortgages to sell other products. People who suggest reverse mortgages to pay for that “vacation you’ve always dreamed of” should not be trusted.
  2. Sometimes only one member of the household is eligible for a reverse mortgage due to the age requirements. Reverse mortgage sellers have been known to promise that the other resident can be added to the loan when they turn 62. If the borrower dies or permanently moves out before the name is added, the loan becomes due.
  3. Borrowers have three days after closing the loan to cancel.
  4. Cash loans from family members are one less-expensive option. Often, seniors are uncomfortable asking for help. However, it is important to remember that the heirs will be responsible for covering the loan in the event the borrower dies or is no longer able to live in or maintain the home. It is better to have the difficult conversation up front.
  5. Although seeking counseling is only required for an HECM reverse mortgage, those looking at other types of reverse mortgages should seek professional advice. A fee-only financial planner is a good source of expert help. This type of planner charges by the hour and not on investments made.
  6. If you are considering taking out a loan to pay for at-home health care, consider that people are living longer than expected. The equity in your home could run out and leave you homeless.
  7. A nonrecourse clause prohibits you from ever owing more than your home is worth. If you move out and sell it, you will only owe what you made from the sale. It does not protect your heirs. If they want to keep the home, they will need to pay the loan in full.
  8. Your debt increases with every payment. The interest owed is determined by the amount of the debt. As the debt grows, so will the interest.
Back to Top

Home Equity Lines of Credit

A home equity line of credit uses your home to secure a line of credit. It is like a credit card with lower interest rates. The line of credit is available to you for a set amount of time from 5-25 years. An HELOC differs from a reverse mortgage in that your home can be foreclosed upon if you fail to pay. However, HELOCs can be a better option in some cases. For instance, in a short term loan of five years or less, HELOCs can save seniors a lot of closing costs and offer quick cash. HELOCs allow more flexibility if the senior is facing the possibility of being moved into assisted living in the next couple of years. They are better for mixed age couples wherein one partner is younger than 62 years old, because there are no age limits on HELOCs. Seniors with very low incomes should take caution when deciding on an HELOC. Payments are required. And banks sometimes freeze HELOCs in times of declining home values.

Traditional or Forward Mortgages for Seniors

Although paying a mortgage on a fixed income can be scary, there are some advantages to a forward mortgage. Perhaps you assumed you would have paid your mortgage off before you retired and now that is just not the case. Should you pay off your mortgage with investments? Refinance? Some options, like taking out a new mortgage, seem less common among seniors, but banks are barred by law from discriminating on the basis of age. In many ways aging opens you up to more options, instead of fewer. The important thing is to choose what is right for you and your family.

New or Forward Mortgage: These are the standard mortgages for 5 to 30 year loans. Lenders consider income and credit history in placing these loans. If you are downsizing, the money you make from selling your home may allow you to borrow a small enough amount that this type of loan is ideal.

Refinancing: A comparison of mortgage rates and average rates of return on your investments will help you decide whether to pay off your mortgage. When mortgage rates drop, refinancing seems like the perfect solution. Refinancing can lower your monthly payments and free up equity in your home. But refinancing costs money. There are closing costs you must consider, and if you are thinking you may want to downsize your home in the near future, paying these costs may not be worth the cut in monthly payments. As always, every situation is different and in the end, you should ask a professional to look over your specific financial needs.

Second Mortgages: These are riskier mortgages that are taken out in addition to primary mortgages. Because of the risk involved, they usually carry higher interest rates and are for smaller amounts.

VA Loans: Veterans of the armed forces and their spouses have the option of taking out a mortgage guaranteed by the Department of Veterans Affairs. They have excellent interest rates and often require little or no down payment.

Back to Top

Basic Home Buying and Selling Tips for Seniors

Buyers looking for their first home have very different needs than seniors. When you bought your first home, maybe you were just married or in your twenties or thirtiesm and you probably considered where your kids would play and go to school. Room for growth might have been important. A big yard sounded nice. But as the kids move out and the yard work becomes more of a hassle, many seniors decide to downsize. Deciding to move out of a home filled with memories can be a tough and emotional decision that takes time. It is important to make these decisions before the maintenance and upkeep become too difficult.

Tips on Selling a Well-Lived-in Home

Before selling a home that you have raised a family in or lived in most of your life, consider this:

  • You have accrued a lot of stuff over the years. It may be time for the kids to take some of it or for a garage sale. Cleaning out your home will make it look larger and let the new buyer imagine their things inside of it.
  • Ask a realtor for advice about staging your home. Then, take their advice, even when it is difficult. Clean off countertops. The knickknacks that have sat on that shelf for years make your home appear to have less space.
  • Price your house according to market value. Unfortunately, no one is going to pay for your memories. You must detach yourself. This is difficult for so many people, but most people find that once they move it is much easier than they thought.
  • Don’t expect to get money back for renovations you have made over the years. Many buyers will want to paint or buy new cabinets anyway. Likewise, if you haven’t updated anything in years, your realtor may suggest that you update carpet or minor cosmetic details so the house shows better.

Suggestions for Seniors Buying a Home

So, you knew what you needed when you bought your first home. The question is what do you need now? You don’t want to buy a new home and realize that it causes you difficulties in a few years. Here are some things to consider when buying your new home:

  • There may come a point where you or your spouse no longer drives. Is there public transportation in the area? Or is there access to the necessities, such as a grocery store? What about delivery services?
  • Stairs are an obvious consideration. As we age, running up and down stairs becomes less and less fun. But what about the shower? Could you fit a chair in there easily? Are there high cabinets or ceiling lights that would need changing? Some of these are easy renovations, but you should consider how much you are going to need to do over the years.
  • Even if you love to garden, a smaller yard is going to be easier to maintain in the long run. If yard work is your passion, you don’t need to give up and move straight into a condo. Remember you need to live in your home now, as well as in the future. It is a good idea to have a plan, though.
  • Sometimes it becomes harder and harder to keep up social ties as we age, but these ties are as important as ever. Are there social activities for seniors in the neighborhood?
  • Are you near old friends and relatives? For some, familiarity is a key component in reducing stress. You may have always thought you would move south when you retired, but be honest with yourself. Is moving away from the grandkids or the neighborhood you have always known going to be worth the move?
  • Of course, there are great advantages to not having to shovel snow in your senior years. And many communities in retirement areas are set up for seniors to thrive.

Summary

The senior years are a time to enjoy the life you have created for yourself. Yes, there are a lot of decisions to be made and many options, but never before has information been so accessible and detailed. Remember to seek professional help before decisions feel like crisis situations. Get ahead of problems. If you know that someday the stairs are going to be a problem or the yard is going to be too much to handle, decide on what to do when that time comes beforehand, and you will escape a lot of anxiety. Most importantly, seek advice. When you do, be open, honest, and ready to implement the plans made. Whether you are looking at a reverse mortgage, a HELOC, or keeping everything just as it is, there is no answer that works for every situation. But if you are prepared and informed, your senior years really can be golden.

Back to Top