By Linda Wyman, Real Estate Financing Specialist
Purchasing a primary residence, an investment property or a second home may be a great way to diversify ones assets. These types of properties may offer equity whether one sells or refinances the property. Home equity is no longer “a sacred cow” that should never be tapped, refinancing to lower the interest rate or tap the cash in the equity maybe a useful financial tool. Refinancing can be a traditional or a reverse mortgage.
eniors are literally sitting on their largest asset—their home; 82% of seniors own their homes. Many seniors are looking ahead to rising prices for food, heat, taxes and medical care. In addition, the current economic conditions have reduced many seniors’ retirement nest eggs. Seniors 62 years old and older are eligible to access their home’s equity with a reverse mortgage; of 62 to 65 year old seniors are becoming the majority of those applying for the Home Equity Conversion Mortgage (HECM). The National Council on Aging reported in 2005 that a majority of seniors prefer to “age in place” in the home they are familiar with and attached to. The issue of how to cover the cost of in-home care, modifying the home to age in place and maintain the home can be resolved by accessing the home’s equity.
Adult children are often helping their senior parents to stay in the family home. This includes attending to their parents’ daily needs and financial assistance. A reverse mortgage may be a useful tool for the seniors and their adult children. Seniors are able to take control of their situation and be more independent with their lives.
The HECM applies to only the primary residence of 62 year old and older individuals. It is called a reverse mortgage because, instead of making payments on the balance owed and decreasing that balance, the senior receives the tax free money to do what they wish with it. The interest charges and the mortgage insurance accrue monthly on the loan balance. The loan is not repaid until the home is no longer the primary residence, the borrower(s) pass away or they fail to keep the taxes and insurance current. The one requirement is that any lien against the house be paid with the proceeds at closing and the cost of the loan can also be paid this way.
Qualifying for the HECM may be easy. There are no income or credit score and history requirements. An appraisal is necessary and the home must be in a well maintained and safe condition. The appraisal is the only cost that is required to be paid “out of pocket”. The income from the loan doesn’t count against Social Security or Medicare Benefits. The money can be used for whatever the senior decides. The home’s title remains in the owner’s name and the home is able to be inherited. The HECM loan must be repaid when it is no longer the senior’s primary residence. This can be accomplished by selling the home or refinancing it.