This type of loan is fast gaining popularity as a means for seniors to supplement their retirement funds. Though still a relatively new type of loan and occupying a small niche, it looks set to become a major part of the lending industry in the coming years. Indeed, it's easy to see why, as many seniors derive great benefits from a HUD reverse mortgage, but one should also bear in mind that there are also some downsides.
What is a HUD Reverse Mortgage?
Unlike a traditional mortgage or home equity loan where the borrower must make monthly repayments to the lender, the lender makes payments to the borrower. With a traditional loan, the more repayments the borrower makes the more equity is put back into the home but with this type of loan, equity is taken out as the borrower receives payments from the lender.
Also, a HUD reverse mortgage (often referred to as a HECM) is insured through the FHA, which ensures that the borrower is guaranteed to receive all the money they're entitled to. If the monthly payments that the borrower receives total more than the value of the equity of the home, the government guarantees to pay the lender the shortfall. Also, if the lender goes bust, the government will pay the borrower everything that they are due. The insurance premiums are paid at the commencement of the loan - 2% of the home's value plus an annual premium of 0.5% which is deducted from the payments made to the borrower.
The greatest benefit of a HECM over a Home Keeper or Jumbo program is that it is guaranteed by the government.
Another benefit is that the borrower never makes monthly repayments and never risks loosing their home. The loan is not repayable as long as the borrower(s) continue to live in the house and keep the taxes and insurance current. Remember, as stated above, the amount owed can never exceed the value of the home.
Unlike, a traditional mortgage, the borrower keeps the title deeds to their home. The lender has no right to take the home away from the borrower.
Because the borrower retains the deeds, the home can be willed. Heirs must repay the loan in its entirety but do not necessarily have to sell the home; they could get a regular mortgage on it to repay the HECM or raise the money through other means.
Unlike home equity loans that can have certain restrictions on what the borrower can do with the money, the money from a HECM can be spent anyway the borrower wants.
However, there are some downsides to a HUD reverse mortgage.
Obviously, the longer the senior lives, the more money is borrowed and the less equity will be left in the home. Also, if property prices go down, there will be less equity in the home. Also, interest rates can diminish the equity in the home. This means that there could be very little equity or assets to be left to heirs.
If you have to sell you home after only a relatively short period of time, you will find yourself paying expensive closing costs. A HECM is really for those who plan on staying in their home for the rest of their life.
A HUD reverse mortgage may not be the best option for everyone, but the quality of life for many seniors has been greatly improved by taking out this type of loan.
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