New rules limit the amount of money you can borrow through a reverse mortgage. Tara Lynn Wagner takes a look at the details in this week’s Money Matters report.
The idea behind a reverse mortgage is simple. It's a way for older homeowners to access the wealth accumulated in their home without having to sell that house. Think of it as a home equity line of credit, but with a major difference.
“The difference is that with a more traditional home equity loan you have to start making monthly payments after you take the money out whereas with a reverse mortgage you can wait until you permanently leave the home before you make any repayments,” said Peter Bell, CEO of the National Reverse Mortgage Lenders Association.
Basically, the homeowner will get the money now or over a period of time and the lender gets it back once the house is sold either by you or your surviving family members.
The money can be distributed in a few ways: a lump sum payment, a line of credit that the homeowner can draw from over time or fixed monthly payments. However, reverse mortgages recently underwent a big change.
Last Septmeber, the Federal Housing Authority placed a limit on the amount of money a homeowner could access in the first year to 60 percent of the available funds.
“And then the balance becomes available in fixed monthly payments or a line of credit that you could tap later on,” Bell said.
There are exemptions, depending on what's called the concept of mandatory obligations or more simply put, the bills you have to pay.
“If you have an existing mortgage you have to pay that off, if you have taxes that are in arrears, you have to bring those current, if you have any federal guaranteed loans, for instance you might still be paying student loans or you might have had an SBA loan that's outstanding,” Bell said.
If those add up to less than 60 percent of the homeowner’s eligible funds, the limit applies, but if it's more than the 60 percent threshold, the homeowner can withdraw whatever they need to pay what they owe, plus another 10 percent. However, keep in mind, a higher amount means a higher upfront fee.
“If you are under the 60 percent threshold, it's one half of one percent. If it's over, it's 2.5 percent,” Bell said.
Not all lenders offer reverse mortgages so you need to find someone that specializes in this product. For a list of recommended lenders, go to www.reversemortgage.org.
In addition, the National Council on Aging has put together a HUD-approved pamphlet on reverse mortgages called "Use Your Home to Stay at Home." To obtain a free copy, go to NCOA.org.