How to Refinance Your Home: When to Do It and What Your Options Are
How to Refinance Your Home: When to Do It and What Your Options Are BY: Nathan Golden | 2022Read Time: 14 min Phone calls, emails,
BY: CASEY MORRIS | 2022
Read Time: 27 min
Based on research from leading reverse mortgage professionals Harlan Accola and Dan Hultquist
A couple of decades ago, reverse mortgages were the ugly stepsister of mortgages. A loan of last resort for retirees who badly needed money.
These days? A reverse mortgage is no ugly stepsister. In fact, reverse mortgages are the Cinderella story of home loans. And if you’re 62 or older, this is one mortgage you’ll want to take to the retirement ball.
Reverse mortgages give you options: to free up more cash month to month, renovate your home, or even buy a new one. Importantly, they can also help lower your tax burden and extend your investment savings*.
So forget everything you’ve heard about reverse mortgages, and allow us to reintroduce you to this strategic home loan option.
A reverse mortgage loan is secured by your home, but you don’t have to make any payments. In fact, you can receive payments. And, the loan does not have to be paid back until you sell the home or the last borrower permanently leaves the home. You can make payments if you choose, but you’re not obligated to.
That means the $1,000+ a month you’d pay on a standard, or forward mortgage, is freed up for other purposes. These may include home renovations, travel, and lifestyle amenities. You can use those funds however you want or need.
You will have to continue paying taxes, homeowners insurance, and HOA fees even if you opt not to make mortgage payments. You’ll also be responsible for maintenance and repairs on the property.
Reverse mortgage definition: A home loan in which money moves from the lender to the borrower, rather than the borrower making payments to the lender.
The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA).
You can find other reverse mortgage options through private lenders. However, the HECM is the only reverse mortgage with government backing.
There are three types of reverse mortgages, and the right one for you depends on your finances and goals.
Think of the HECM as an FHA reverse mortgage. They’re different from FHA loans, which are “forward” mortgages for buying homes. But they’re all administered under the FHA, which is part of the U.S. Department of Housing and Urban Development (HUD).
A HECM LOC is particularly attractive because you can use funds only when you need them and the available amount is guaranteed to grow, Harlan Accola author of “Home Equity and Reverse Mortgages: The Cinderella of the Baby Boom Retirement,” writes. Note that the guaranteed growth only applies to unused funds.
But how you take your reverse mortgage disbursements will depend on your needs and goals. Your financial advisor and lender can help you make that decision.
“Here is the biggest reason why you want a HECM LOC in retirement: it has a guaranteed growth factor for as long as you live in the home, no matter what.”
HARLAN ACCOLA, AUTHOR OF “HOME EQUITY AND REVERSE MORTGAGES”
“If the value of the home goes down, the stock market crashes, interest rates skyrocket, or the economy is awful, then the available amount of your equity will continue to grow every year between four and six percent — based on current rates — no matter what happens. It’s always wise to get an umbrella before it starts to rain.”
HECMs are government-insured, and you can use the funds for any purpose you choose. However, you must meet with a HUD-approved counseling agency for reverse mortgage counseling before you close on the loan.
Your HUD-approved reverse mortgage counselor will explain all of the financial implications of a reverse mortgage so you’re clear on your obligations and fully understand the loan.
Proprietary reverse mortgages are offered by private lenders, and they are not backed by the government.
The Federal Trade Commission (FTC) says that a proprietary reverse mortgage may make sense if you have a high-value home with only a small mortgage left on it. Private lenders may approve you for a larger advance on your loan, so you could have access to a larger sum of money from the home in your retirement.
As the name suggests, a single-purpose reverse mortgage allows you to take money out of your home for specific use. These reverse mortgages are typically offered through municipalities or government agencies, not by lenders.
For example, a city might provide single-purpose reverse mortgages to homeowners who need sidewalks in front of their row homes. The city can issue a loan that doesn’t need to be repaid until the property sells so the homeowners can have that upgrade without paying for it upfront.
The FTC says that these can be good options for low- to moderate-income homeowners. So, if you have limited income but need to renovate your home for improved livability as you age, a single-purpose reverse mortgage may allow you to cover those costs while avoiding dipping into your retirement savings.
Common knowledge used to suggest that only destitute people should pursue a reverse mortgage. Folks who had little savings and very low income who needed a fast cash injection to get by.
But that’s no longer the case. In fact, it can make a great deal of sense for a borrower who is 62 and still working to take out a reverse mortgage, especially if they’re comfortable making payments for the first few years to increase their equity and help their line of credit grow.
Accola warns that a reverse mortgage may be critical to a fully funded retirement, regardless of how much you have saved. As the Baby Boomer generation ages, the demands on Social Security and other senior benefit programs are becoming enormous.
“People are living longer, needing more healthcare and long-term care, spending more, and saving less — and somehow, this is all supposed to come out OK?”
The fact is, relying on Social Security or retirement investments alone may not provide the retirement you’ve envisioned.
“No matter how good a job financial advisors do, there is not enough money out there to get all the Baby Boomers to life expectancy, and those who do have enough money may have it all wiped out at the end with healthcare or high taxes to take care of those who didn’t save,” Accola writes. “It is going to affect everyone unless we do something now.”
Accola’s words are a sharp wake-up call, but they needn’t scare you. If you own your home, you may be able to put it to use to extend your retirement savings* and provide cash flow that can see you through your retirement.
Of course, everyone’s circumstances are different, as are their motivations for taking out a reverse mortgage.
Here are three key reasons someone might consider a reverse mortgage, according to Dan Hultquist, author of Understanding Reverse: Simplifying the Reverse Mortgage.
You might use some of your equity to pay off other debts or pad your monthly budget. Or, you can also use the money to cover medical costs, such as home equipment, renovations to age in place, or to pay for in-home care.
Once you see a reverse mortgage as a retirement benefit, and as part of your financial planning strategy, things get really exciting.
A reverse mortgage can enhance your retirement in many ways:
Let’s take a closer look at how each of these works.
Without a required monthly mortgage payment, you have extra cash on hand to cover your necessities, plus luxuries such as taking a retirement trip, enrolling in a course you’ve had your eye on, or traveling to visit your kids and grandchildren. Even if you don’t make a mortgage payment, you must still pay taxes and insurance and maintain the home.
A HECM reverse mortgage can help you out tax-wise in a couple of ways. One is that the funds you receive are not taxable income*, so you can get monthly installments or draw on your line of credit and not owe on those amounts.
“Under current tax guidelines, it’s possible not to pay federal income tax on capital gains if the taxpayer can stay in a lower tax bracket*,” Hultquist writes. “One way to accomplish this is to strategically draw funds from non-taxable sources, like HECMs.”
By having a line of credit or monthly installments to live on, you extend the time your retirement investments have to grow. And not making large withdrawals from your investment accounts helps keep your taxable income lower*.
Access to reverse mortgage funds can create more retirement security because you’ll have money available for expenses such as long-term care. The more money you have access to, the better care you’ll be able to afford, and the more options you’ll have for being able to enjoy the Golden Years comfortably in your home.
Money you receive from your HECM does not count as income, so it won’t be taxed as such. But if you put the funds in an interest-accruing account, such as a high-yield savings account, you could owe taxes on any interest you earn.
If you make payments on your HECM loan balance, you may be able to deduct any money paid toward the interest and insurance, potentially reducing your tax burden for the coming year*.
HECM distributions affect these benefits in different ways. Because HECM disbursements don’t count as income, relying on these rather than solely on retirement investment withdrawals can reduce the amount of income used to used to calculate your Medicare Part B premiums.
However, Medicaid and Supplemental Security Income (SSI) are means-tested benefits — meaning there are income limits to qualifying. A high monthly disbursement from your HECM could put these benefits out of bounds for you.
The best thing to do is talk with a financial planner about how a reverse mortgage fits into your retirement plan and the best way to structure your withdrawals.
A reverse mortgage can help you live more comfortably in your current home if you plan to age in place. But you can also use the HECM for Purchase option to buy a new home.
With the HECM for Purchase, a lender will finance up to a certain amount as a reverse mortgage. You’ll make up the difference with a down payment. This can be a good move if you plan to sell your current home and rightsize into something new in retirement.
Let’s say you sell your current home for $300,000 and plan to buy a $200,000 bungalow near the beach. You put down $100,000 using money from the sale, and you take out a HECM for the remaining $100,000. Now you have $200,000 in cash left over from the sale, plus a reverse mortgage that doesn’t require you to make monthly payments. You just need to pay taxes, insurance, and maintain the home.
You’re living the dream in your beachside home without having to worry about the monthly mortgage, and you can sleep peacefully knowing you have $200,000 in the bank to cover your living expenses before you need to draw on your retirement savings.
The required down payment on your new home is determined on a number of factors, including your age (or eligible non-borrowing spouse’s age, if applicable); current interest rates; and the lesser of the home’s appraised value or purchase price.
Reverse mortgages are designed specifically for older homeowners, so the reverse mortgage age requirement begins at 62.
If you’re, say, 59 and your spouse is 62, they would need to take out the mortgage in their name only. You would not be eligible to be a co-borrower because you’re younger than the minimum age for a reverse mortgage.
But if you’re both 62 or older, you can apply as co-borrowers.
If you are younger than 62 and your spouse is taking out a reverse mortgage, you can remain on the title to the home.
In addition to the reverse mortgage age requirement, you’ll need to meet several other criteria as well:
You may qualify for a reverse mortgage with less than 50% equity, but you’ll need some funds available at the loan closing.
If you opt for a HECM reverse mortgage, you’ll need to provide an annual certification that the home is your primary residence. So if you’re planning to keep your current home but spend most of the year at a vacation property, you won’t be eligible for a HECM.
One of the great things about reverse mortgages is that a range of home types are eligible:
If you live in a condo or manufactured home, they must be HUD- or FHA-approved or qualify for single-unit approval, which refers to an individual condo unit.
If you meet these reverse mortgage qualifications, your lender will still need to verify that you have enough savings or income to cover:
A reverse mortgage gives you the option to not make any payments until you move out of the home. You just need to pay taxes and insurance and maintain the home.
But you don’t have to take the no monthly payment option.
In fact, many people choose to make payments, even if they don’t have to. Why? A few reasons:
If you’re able, making payments can be a great way to maximize the overall value of your reverse mortgage.
But if you cannot or choose not to make payments, that’s OK. When you move out of the house or pass away, you or your heirs can sell the home to pay off the reverse mortgage. If you want to keep the home in the family, you can also pay it off in full when you move out. Or, your heirs can refinance to a forward mortgage to keep the house in their name.
Your reverse mortgage costs will depend on your particular loan, and your lender can calculate them for you.
Closing costs for a reverse mortgage can include origination and underwriting fees, along with the FHA’s upfront mortgage insurance premium (MIP). The upfront MIP is 2% of the loan amount.
Your lender can charge up to 2% of the first $200,000 of your loan’s value plus 1% of the remaining amount above $200,000 in an origination fee. However, HUD caps the origination fee allowed on HECMs at $6,000.
Some closing costs may be rolled into the loan, though a larger loan balance means more interest and insurance owed when the mortgage comes due.
You’ll also pay an ongoing mortgage insurance premium of 0.5% of your loan balance.
How much money you get from a reverse mortgage depends on a few factors. These include how much equity you have in the home, how you choose to receive the funds, and existing debts on the home.
When you apply for a reverse mortgage, your lender will calculate your principal limit. Then, they’ll look at your “mandatory obligations,” which may include closing costs, the remaining balance on your current mortgage, and federal debts.
The lender subtracts the mandatory obligations from your principal limits to get your net principal limit, or the amount you can actually borrow.
Federal law generally prevents you from taking your net principal limit right away. This is a protection against using up all of the equity in your house too quickly and not leaving enough left for emergencies.
Here’s where your disbursement type comes into play.
Fixed-rate HECM borrowers are limited to one disbursement at the time the loan funds. Depending on their mandatory obligations, a fixed-rate borrower may have access to as little as 60% of their principal limit. So, if you have a principal limit of $200,000 and you choose the fixed-rate loan option, you may have access to only $120,000 (60%) at closing, and no more.
However, if you opt for the line of credit, you can draw on the initial $120,000 for the next 12 months and then have access to the remaining $80,000 after that first year.
If you opt to take all of the available money as a lump sum, you’ll get a large payout once. This may be necessary depending on your circumstances. But as you can see, there are drawbacks to this approach and it limits the amount of money you can actually access through the reverse mortgage option.
A reverse mortgage can be a great option. But there is no one-size-fits-all answer. Someone who is in their mid-70s and on a fixed-income and struggling to make ends meet but who has equity in their home may benefit from a reverse mortgage because they can access badly-needed cash.
Meanwhile, a person who is 63 and plans to work a few more years might also benefit. They can create flexibility in their finances by having an optional mortgage payment and giving themselves access to a line of credit that will prolong the life of their retirement savings. You must still pay taxes, insurance, and maintain the home.
A reverse mortgage can be a good idea even if you’re comfortable making your current mortgage payments. There’s no guarantee that you’ll feel the same once you fully retire and are living on your savings.
By opting for a reverse mortgage now, you can be strategic in whether and how you make your payments and how you can use your equity to set you up for a comfortable retirement all around.
A reverse mortgage can be a great boon to your finances under the right circumstances. But it’s not the right choice for everyone.
You may want to consider other options if…
Let’s talk for a minute about the first point. Before deciding against a reverse mortgage because you want to leave your children your home, make sure they really want the home and plan to live in it. According to Accola, 99% of heirs sell their parents’ home after they inherit.
If you’re assuming your kids will want to keep the house in the family, ask them outright. And if they say yes, make sure they understand what that means. Do they plan to leave their current homes and move into yours? If not, can they afford the taxes and upkeep on the property, in addition to their current home?
Talking about what happens to the family home after you die is a significant and emotional conversation. But it’s one that should be made with a clear understanding of everyone’s intentions and goals.
If your kids don’t want to inherit the home, or they’re sad at the idea of selling it but know they can’t afford to keep it, it’s best to get that on the table now. You don’t want to sacrifice a potentially life-changing financial option based on assumption or sentiment.
But let’s say they do want to keep the house in the family. There’s no reason your kids can’t inherit the home if you have a reverse mortgage. But if that’s the plan, it’s best for them to start thinking about what they need to get in place so they can take ownership of the house when the time comes.
One of the disadvantages of a reverse mortgage is that if you don’t make payments, your loan balance increases. This is the opposite of a forward mortgage, where your loan balance gets lower each month as you pay down the principal and interest.
If your children hope to inherit the house or keep it in the family, you or they will need to pay off the loan when you move or pass away.
If they qualify, the heirs can refinance the loan into a regular forward mortgage once the home is officially theirs. They would have to have high enough credit and income to do so. The home would also need adequate remaining equity.
The good news is, HECM reverse mortgages are non-recourse loans. That means you — and your heirs — can never owe more than the home is worth**. This is quite helpful if you decide to refinance or want to pay off the house when you move to keep it in the family.
Only owing what the house is worth prevents you from being underwater on a loan. If property values drop, you and your heirs are not going to owe more on the house than it’s actual value**. That’s because the HECM is FHA-insured.
Here’s an important factor, though: Reverse mortgages never come due because of age. You can live in the home as long as you want without worrying about having to pay the loan before you’re ready, as long as you can afford the taxes, upkeep, and other ongoing expenses.
If your spouse dies or permanently vacates the home because of illness, and you are not a co-borrower on the reverse mortgage, you may qualify to remain in the home until you pass away or decide to move, if you meet the eligibility criteria:
When you pass away or leave the home, the mortgage will come due. Then you’ll need to pay off the loan or sell the house.
A reverse mortgage is like any other mortgage in that there is a balance owed on the property. When the last mortgage-holder dies, their heirs can sell the property or refinance to a forward mortgage in their names if they want to keep the house.
Again, the heirs will never owe more on the home than it’s actually worth**. If the house is underwater, the FHA will absorb the losses.
Neither the FHA nor the lender confiscates the home or remaining equity when the borrower dies.
The heirs have the option of whether to keep the home through refinancing or purchasing it outright themselves or to sell it. If they sell, they can use the proceeds to pay off the reverse mortgage and keep any additional profit.
There’s no getting around it: reverse mortgage scams do exist. Malicious individuals and companies con senior citizens by promising them investment opportunities or free homes. They may offer “help” with avoiding foreclosure.
How can you be sure you’re not getting scammed? A few ways:
Additional tips from the FBI:
If you’re interested in a reverse mortgage, talk to a lender that has a track record of closing these types of loans.
Ask them about their experience — how many reverse mortgage loans do they do each year? Can they point you to reverse mortgage reviews and testimonials? Is the company licensed in your state? A legitimate lender will be glad to answer these questions and provide any verification you need.
No monthly payment required
Will not own home free and clear
Reduce taxable income*
Heirs will have to pay off or refinance the loan, or sell
Extend investment income*
Must still pay taxes, homeowners insurance, and maintenance expenses
More money for travel, renovations, time with family, quality long-term care, lifestyle needs
Need to strategize carefully to avoid spending money too quickly or losing out on government benefits
Reverse mortgages can be a valuable tool for improving cash flow, enhancing your quality of life, and maximizing your retirement savings. The key is to work closely with your financial advisor and an experienced reverse mortgage lender to determine if a reverse mortgage works for your retirement goals.
Reverse mortgages are non-recourse loans, which means you’ll never owe more than the home is worth**. But as with any mortgage, the lender needs to be repaid at some point. When you die or move out of the home, you or your heirs will need to pay off the loan with cash or a refinance, or sell the house. And the lender can call in the loan early if you do not pay your property taxes and insurances or let the property fall into disrepair.
A reverse mortgage with a reputable lender is not a ripoff. It can be a life-saver for older homeowners who are struggling to meet their expenses. It can bolster retirement savings and cash flow substantially even for those who have strong savings and investments. It’s important, though, to only work with licensed, legitimate mortgage lenders.
Do not sign contracts with unlicensed lenders or companies and individuals promising something for nothing. Always consult your financial advisor and a HUD counselor to make sure an offer is legitimate.
Choosing a reverse mortgage is a big decision, and you don’t have to make it alone. Talk with a lender and with your financial planner about how it might fit into your retirement strategy or solve some of your short- and medium-term financial needs.
You’ll want to discuss the decision with your children, too. Especially if you want to keep the home in the family. No doubt, your kids will want you to make the choice that gives you the happiest and most secure retirement possible.
Talking about your family goals will guide your conversations with your financial planner and help you make the best choice for your retirement and your legacy.
*This article does not constitute tax or financial advice. Please consult a tax and/or financial advisor regarding your specific situation.
**There are some circumstances that will cause the loan to mature and the balance to become due and payable. Borrower is still responsible for paying property taxes and insurance and maintaining the home. Credit subject to age, property and some limited debt qualifications. Program rates, fees, terms and conditions are not available in all states and subject to change.
Fairway is not affiliated with any government agencies. These materials are not from HUD or FHA and were not approved by HUD or a government agency. Reverse mortgage borrowers are required to obtain an eligibility certificate by receiving counseling sessions with a HUD-approved agency. The youngest borrower must be at least 62 years old. Monthly reverse mortgage advances may affect eligibility for some other programs. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply. Equal Housing Opportunity.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.
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