Terry provides answers to questions on reverse mortgages
BY TERRY SAVAGE SUN-TIMES COLUMNIST Jul 14, 2006
Updated: May 3, 2013 12:14PM
Originally February 21, 2002
Reverse mortgages are the answer to a prayer for senior citizens who own their own homes and need more income, but don’t want to move. I have no hesitation in recommending them, and hope this column answers all your questions.
Q. What is a reverse mortgage?
A. This is simply a way to take money out of the equity you’ve built up in your home over the years--without any risk that you’ll be forced to move.
Q. Who can apply for a reverse mortgage?
A. People over age 62 who have paid off their mortgage completely, or have only a small balance left.
Q. How do I get the money?
A. You sign up with a participating lender, such as a bank or mortgage company. They’ll process the paperwork and give you a choice of ways to receive the money:
**You can take out one lump sum.
**You can get a fixed check a month for life, as long as you live in your home.
**You may opt for a fixed check for a set number of years, perhaps just long enough to pay off the condo in Florida.
**Or you can just get a line of credit against the equity in your home, which you can draw down as needed.
Q. How much money can I get out of my home?
A. The size of your lump sum, or lifetime monthly check, is determined by three factors: the current appraised value of your home; your age, and the current level of interest rates. However, there are federal limits on the total size of the loan, based on where you live. In the Chicago area, the maximum FHA lending limit is $234,150 worth of equity for a reverse mortgage loan.
For example: A 65-year-old homeowner with a home appraised at $150,000 could receive a monthly check of $433.87 for life. A 75-year-old would receive a $599.12 monthly check. You can do anything you want with the money.
Q. WHAT IF I RUN OUT OF EQUITY IN MY HOME? CAN THEY FORCE ME TO MOVE?
A. You can’t run out of money. They can’t force you out of your home. No matter how long you live, and how much money you withdraw, you can never be forced out of your home!
Q. How do they get their money back?
A. When you do sell your home, or when you die, the house is sold. The mortgage company is repaid all the money it advanced to you over the years. That is, the total of all those monthly checks plus interest that floats with market rates over the years. Any remaining balance goes to your heirs. Or if your heirs want to keep the house, they can take out a new mortgage to repay the reverse mortgage balance.
Important note: The repayment amount can never exceed the value of your home at the time the loan is repaid. You or your heirs can never owe more than the home is worth when you die or move out and sell it.
Q. What if I have to go into a nursing home?
A. If you move out of your home for longer than one year, then the home can be sold--unless your spouse and co-owner is still living there. But if you just go to Florida for the winter, or spend time in a hospital or a short stay in a nursing home, you don’t have to worry about your house being sold out from under you.
Q. HOW MUCH DOES IT COST?
A. There are fees and closing costs, much as if you were applying for a regular mortgage. Plus, you’ll also pay an FHA insurance fee of 2 percent of the total property value. That portion goes to HUD for the FHA insurance, which makes sure the lender will be repaid if you outlive the value of your house.
Special note: The fees can be substantial--but they are calculated into your net monthly check. In the example above, on that $150,000 property, you would pay about $7,100 in fees. Of that amount, $3,000 goes to HUD, $3,000 to the lender, and the balance is appraisal fees and closing costs.
The total fees are capped by law. But that doesn’t mean some lenders won’t undercut that cap. So be sure to ask not only about the amount of the monthly check, but the fees that go into establishing that check. Since HUD requires anyone taking out a reverse mortgage to get independent counseling, typically provided by AARP over the phone (800-209-8085), you’ll have plenty of chances to ask these questions.
Q. Where do I go to find out more?
A. Not all banks and mortgage companies originate reverse mortgages. In the Chicago area contact: Mary Ressetar at Alliance Mortgage Co. (847-253-8605); Bob Canino at Cole Taylor Bank (630-932-3107), or Carolyn Hummel at ComCor Mortgage (847-882-6240). You can also go to www.reversemortgage.org to search for other lenders in Chicago or other cities.
Investigate a reverse mortgage. You invested in your home over the years. Now it can pay you back. And that’s The Savage Truth.
Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp. and Pennzoil-Quaker State Co. Send questions via e-mail to email@example.com. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast.