Reverse Mortages: Now there are two varieties

Reverse Mortgages have become popular with people who want to cash out some of their equity for living expenses, medical expenses, or other long term expenses.  Owners over the age of 62 with sufficient home equity may qualify for a reverse mortgage.  The advantage for many is that monthly loan payments are not required.  Instead the principal and interest come due when the residence is sold or when the borrower moves or dies.  In the meantime, the owner has had the use of the property’s equity in funds taken in monthly payments, a lump sum, or a line of credit.

There are now two types of Reverse Mortgages: the Standard and the Saver.  The Standard has been around for some years while the Saver was introduced in 2010.  Both have upsides and both have drawbacks.

The Standard Reverse Mortgage allows you to borrow more of your equity than a Saver Reverse Mortgage but it comes with a price, namely a Federal Housing Administration premium of up to 2% of the value of the residence charged to protect against losses on these loans, along with other upfront fees due at closing.  All together, these fees can add up to 4%-5% of the value of your home, which means these loans are generally only appropriate for borrowers who believe they will be able to stay in their homes for a considerable period of time.

The FHA has cut the insurance premium to .01% for Saver Reverse Mortgages, and some lenders are promoting Saver Reverse Mortgages by reducing other upfront fees.  However, these up-front savings come with costs over the life of the loans.  First the interest rate may be slightly higher for a Saver.  Also the amount that can be borrowed is 10% to 20% less than what a person can borrow through a Standard Reverse Mortgage.  Some lenders also limit the ways the equity can be paid under a Saver to the lump sum distribution only.

These mortgage products are quite sophisticated.  You should research them carefully prior to committing and obtain professional advice to answer any questions you may have.  If you are interested in a Reverse Mortgage the professionals at Coaty and Woods, P.C. can assist you in your research.  In addition, you should contact a reverse-mortgage counselor who is approved by the federal government.  Go to www.hud.gov or let our office assist with finding such a counselor.  We can also recommend lenders with expertise in this field.