Different Strokes for Different Folks: Compare Reverse Mortgage Options
There are many methods for exchanging home equity for cash, including home equity lines, cash-out refinances, selling the property, or taking a reverse mortgage. Of these methods, only the reverse mortgage combines the benefits of remaining in the home, avoiding real estate commissions and capital gains taxes, and no monthly payment requirement. If you decide that a reverse mortgage is for you, your next step is to choose among the different available types. Here are their descriptions including their pros and cons.
Single Purpose Reverse Mortgages
These reverse mortgages are offered by state and local government agencies and are designed to help homeowners with low-to-moderate income maintain or improve their homes and pay their property taxes. They feature very low or no costs and interest rates. To see if you are eligible, you can contact Area Agencies on Aging (AAAs) at 1-800-677-1116 for information on programs in your area.
- Advantages: Low rates and low or no fees
- Disadvantages: Limited eligibility and availability, proceeds must be used for stated purpose
Home Equity Conversion Mortgages (HECMs)
These are backed by the U.S. Dept of Housing and Urban Development (HUD) and are the most popular reverse mortgage in the country. In fact, over 90% of all reverse mortgages taken out are HECMs. Loan amount limits were recently raised to $417,000 in most locations but can be as high as $625,500 in areas designated as "high-cost" by HUD. HECM origination fees are limited by the federal government to 2% of the first $200,000 and 1% of any balance exceeding that, to a maximum of $6,000. HECMs also require the purchase of mortgage insurance. This insurance charge comes to another 2% upfront, plus a monthly premium.
- Advantages: Limits on loan fees, HUD-regulated for consumer protection, greater percentage of home equity available to borrower
- Disadvantages: Limits on loan size, mortgage insurance required
Fannie Mae Home Keeper Reverse Mortgage
The chief advantage of Fannie Mae's proprietary program has always been higher loan limits than those of HECMs. However, recent legislation eliminated that advantage. And Home Keeper loans typically allow you to borrow a lower percentage of home equity. However, one advantage Home Keeper programs offer is that these loans don't require the purchase of expensive mortgage insurance. So if you have an expensive home but don't need the maximum loan size, it might be cheaper to take a Home Keeper loan instead of an HECM.
- Advantage: No mortgage insurance requirement
- Disadvantages: Lower percentage of equity can be borrowed against, fees and rates may be higher than those of HECMs
Jumbo Reverse Mortgages
There are many private companies offering specialty mortgages for those who want a loan that doesn't meet Fannie Mae or FHA guidelines. Typically, these homeowners want to borrow against a greater percentage of their equity, obtain a higher loan amount, or both. Expect increased fees and rates for the privilege, though. Terms on these loans range widely--and while most of these reverse mortgages carry variable rates, fixed rates are available. Lender fees can vary a great deal and are generally negotiable. Shopping with several lenders is probably most important in this category because rates and fees aren't limited by law. The Total Annual Loan Cost (TALC) disclosure that your lender is required to give you is very helpful in comparing these reverse mortgages and helping you select the best deal.
- Advantages: Greater portion of equity can be borrowed against, and higher loan amounts are available
- Disadvantages: Cost are higher and shopping for the loan involves more work
Know What Type of Loan Suits You Best
When you have found a loan professional you trust, be prepared to provide an accurate estimate of your home value, the ages of every owner of the home, and how much money you hope to borrow. Reverse mortgage calculators like the one provided by AARP can also give you an idea of how much you can borrow based on these variables. And if your requirements exceed Fannie Mae or FHA limits, check with several jumbo reverse mortgage lenders, compare rates and fees, and choose the best deal.
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