Reverse-Mortgage-Truth.com

This is post one of a series.

There are two surprisingly similar home mortgage options that seniors can consider to tap into their home equity: the reverse mortgage and the option ARM. The option-ARM has been frequently used by seniors to take cash out of their home equity since monthly payment amounts are much less than those of the traditional 30 years fixed rate mortgages for the same loan amount. Another popular solution is the reverse mortgage which is designed for the same purpose, but conveniently requires no monthly principal or interest payments. So given the similar function of these loans, the question becomes, which loan is better for seniors, the reverse mortgage or the Option ARM?

We'll dive into the topic in the next post.

As I mentioned earlier, the typical reverse mortgage requires special Federal Housing Authority (FHA) insurance. You may wonder why this insurance is necessary.

The lender is taking a risk by not requiring any repayment for as long as you, the senior with a reverse mortgage, choose to live in the home. Even if you live in your home for the next 50 years, they can't ask you for a payment. And the money that you receive from the reverse mortgage must remain available to you for the life of the loan.

The reverse mortgage is "non-recourse". The lender cannot come after you, your estate, or your heirs if the housing market crashes and the amount owed is more than your home is worth. So the lender - not you - is taking the risks that you live a really long time or that the housing market crashes.

Given those risks, no lender in their right mind would make such a deal without some assurance that they won't lose huge amounts of money. But since the FHA makes up the difference in case of a loss, the lender has little risk and can offer the reverse mortgage at extremely low interest rates. FHA can't provide that guarantee for free, so they charge borrowers for it in the form FHA insurance, which is like a group insurance policy. Everyone pays in to it so when a few go upside down, there is money to cover the loss to the lender.

Well, that all sounds great for the lender, but what do you, the senior home owner, get for it? For starters, this insurance makes the Reverse available to you at really low rates in the first place. More importantly, your money is guaranteed to you by the FHA even if the lender were to go out of business. So you will be able to use the money while you live in your home and won't have to pay back a dime for the rest of your life!

The much-anticipated Economic Stimulus Act of 2008 that has allowed HUD, on March 6th, to increase the FHA loan limit has specifically excluded the Home Equity Conversion Mortgage (HECM reverse mortgage) from any increase. The FHA loan limit for reverse mortgages will remain at $362,790 for counties with high home values and as low as $200,160 for counties with lower home values. Most densely populated counties in California have a HECM reverse mortgage loan limit of $362,790.

The FHA loan limit is the amount of home value that FHA will recognize in calculating the amount of money that a senior will qualify for under the HECM reverse mortgage program. For example, if a senior’s home that is located in a high-value county, appraised for $400,000, they will qualify for the exact same amount of money as if their home appraised for only $363,000. But if the appraised value is below the county’s FHA reverse mortgage limit, then the senior will qualify for proportionally less money.

What does this mean for seniors? If you were waiting for an increase in the HECM loan limits, don’t hold your breath. The idea is still being kicked around in congress, and could be put into the FHA Modernization bill, but it does not seem to be high on any congressmen's priority list. I think they’re too concerned about saving all the homeowners who are facing foreclosure.