According to the U.S. Census Bureau, there are approximately 25.7 million people who live in Texas, and about 10.3% of them are seniors over the age of 65; that is about 2.6 million Texans. As Texans age, the cost of retirement becomes the focus of any financial planning. By the time someone turns 65, hopefully they have saved enough to live comfortably. However, as life expectancy increases, this is less the case.
For many people, their home is their greatest asset. With more seniors choosing to age in place , they do not want to sell their homes to pay for their retirement because they want to live in their home as long as possible. That ties up a large portion of their financial assets. A Reverse Mortgage is a way to liquefy, or free up, a home’s equity, allowing seniors to access that asset when they need it the most.
What is a Reverse Mortgage? The U.S. Department of Housing and Urban Development, or HUD, offers a Home Equity Conversion Mortgage, or HECM. This program is overseen by the Federal Housing Administration. A Reverse Mortgage allows a homeowner age 62 or over to convert some of their home’s equity into cash; essentially, the homeowner borrows against the equity in their home, with an obligation to repay the loan when they no longer use the home as their principal residence, or fail to meet the obligations of the mortgage.
If you are age 62 or over, own your home outright or have a low mortgage balance that can be paid when you close on the Reverse Mortgage, and you live in the home on which you want to convert the mortgage, you are generally eligible for a Reverse Mortgage. However, before you can make the final decision to use an HECM, you are required to receive loan information from the HECM counselor of your choice. Your lender is usually your HECM counselor; the cost for this service is either free or at a very low cost, depending on the counselor you choose.
A home is eligible for an FHA mortgage conversion even if you did not use an FHA insured mortgage. The home must be a single family home, a 2-4 unit home if you occupy one of the units, or HUD-approved condominiums and manufactured homes that meet FHA requirements. You could choose a second mortgage or a regular home equity line of credit, however you must have enough income to qualify for the loan, and you would be required to make monthly payments on the principal and interest.
A second mortgage is like buying your home all over again, with all the same financial obligations. Unlike a second mortgage, a Reverse Mortgage pays you, as a source of income. While you would not have a monthly principal and interest payment, you would still be required to pay all the taxes associated with the home, and you must carry homeowner’s insurance. You are also required to pay all the utilities costs. You can use your income payment any way you choose, including paying for long-term care expenses.
With a Reverse Mortgage, the loan must be repaid if you sell your home, or no longer use it as a primary residence. Once the loan is paid in full, any proceeds from the sale of the home become part of your estate; if you do not have a living spouse, the proceeds can be transferred to heirs.
There are four factors that determine the amount that can be borrowed:
- Age of the youngest borrower
- The current interest rate
- The lesser of the appraised value, the HECM FHA mortgage limit of $625,500, or the sales price
- Whether the borrower chooses the HECM Standard Initial Mortgage Insurance Premium (IMIP), or the HECM SAVER IMIP
The borrower receives a greater amount when they choose the standard option. The HECM home page has an online calculator that can give the borrower an estimate of the amount of funds that would be available.
There are five different plans for receiving your payments:
- Tenure- equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
- Term- equal monthly payments for a fixed period of months selected.
- Line of Credit- unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
- Modified Tenure- combination of line of credit and scheduled monthly payments for as long as you remain in the home.
- Modified Term- combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.
Reverse Mortgage originators are required to be licensed in the state of the home they are serving. Since procedures, laws and regulations can vary from state to state, be sure that any information you receive is about Texas RMs.
Aging in place is deciding to remain in your own home as long as you are able. Long-term care expenses can be high, and not everyone readily has the resources to pay for in-home care and support. A Reverse Mortgage can give you the peace of mind that allows you to relax and enjoy your retirement.
Source: Texas State Quick Facts