Using a Reverse Mortgage to Pay Off Home Loans
Seniors Can Use Equity to Eliminate House Debt and Monthly Payments
Nov 15, 2009
Seniors who own their home have been able to use a reverse mortgage to gain access to the home's equity with no corresponding monthly payment. This payment-free resource has allowed thousands of retirees to travel, make otherwise impossible purchases or just to live comfortably on limited incomes. Less well-known is that senior homeowners are not required to own their home free and clear in order to obtain a reverse mortgage. In fact, a reverse mortgage can be used to eliminate all home loan payments.
The HECM Reverse Mortgage
According to a study conducted by Hui Shan (Reversing the Trend: The Recent Expansion of the Reverse Mortgage Market, April, 2009, Federal Reserve Board of Governors), the Home Equity Conversion Mortgage (HECM) accounts for more than 90% of all reverse mortgages in the United States. The program was established by Congress in 1987, and the first HECM loan was processed two years later. Although millions of homeowners have qualified for the program, it has been employed by relatively few borrowers. However, within the past year, increased lending limits coupled with asset losses in IRAs appear to have heightened interest in reverse mortgages.
An HECM reverse mortgage differs significantly from conventional home mortgages. With a conventional, or forward, mortgage, the homeowner borrows some portion of the home's appraised value for a fixed period of time, typically 15 or 30 years, and then repays the amount borrowed plus interest on a monthly basis. Failure to make loan payments can result in foreclosure and loss of the home.
With a reverse mortgage, the homeowner borrows some portion of the home's appraised value, but there is no fixed period of time to repay the loan, and monthly payments are not required. Instead, interest accrues throughout the life of the loan, but is not paid back to the lender until the house is sold, the homeowner vacates the property for 12 months or dies. In addition, the total amount due the lender, including principal and interest, can never exceed the sales value of the home.
Consequently, although not for everyone, a reverse mortgage can be an ideal product for a homeowner who needs or wants to access cash equity in his home without any monthly payback requirement, and who is not concerned with creating an estate through equity value in his home.
Using an HECM Reverse Mortgage to Pay Off Existing Home Loans
Seniors considering applying for a reverse mortgage may not know that free and clear ownership of their home is not a requirement. It is true that the reverse mortgage must be the only loan secured by the home, but as long as any existing mortgages or other secured loans are paid off with proceeds from the reverse mortgage, this basic requirement is satisfied. In fact, using a reverse mortgage specifically to eliminate an existing conventional mortgage can be materially beneficial to a homeowner.
For many homeowners, the relatively low maximum appraised value of $200,000 which existed until the fall of 2008 prevented the use of a reverse mortgage to pay off a conventional mortgage. This was because the amount available to the borrower was only a part of the appraised value, and often the existing conventional mortgage exceeded this lower number. The loan available to a borrower under a reverse mortgage depends upon several factors, including his age as well as the appraised value of the home. In addition, prior to changes in the law in late 2008, available funds varied by the state and county where the home was located.
However, changes to the law in 2008 both increased the maximum appraisal value to $417,000 and standardized this maximum nationwide. That maximum was increased again in 2009 to $625,500. This means that a senior (62 or over) homeowner with an existing conventional mortgage may now be able to obtain a reverse mortgage that eliminates his conventional mortgage and its monthly payment. Depending upon other factors, including the appraised value of the home and the borrower's age, the borrower may, in fact, be able to obtain significant additional funds, as well.
Choosing to Pay Off an Existing Conventional Mortgage with a Reverse Mortgage
Deciding to use a reverse mortgage for any purpose, including the elimination of a conventional mortgage, depends upon many individual considerations. Reverse mortgages are not suitable for everyone, and thorough research should be conducted before making such a decision. For homeowners with more need for additional cash than for building a home equity estate, however, a reverse mortgage might be the perfect solution.
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