Q. We are in our late 70s and house rich and cash poor. We love our home but may need to sell and downsize so we can afford to eat and pay our bills. At this point in our lives we would really hate to have to move. Does it make any sense to get an interest-only home equity loan, make the smallest payments and try to stay here as long as possible? If we weren’t able to keep up with the payments we’d then sell our home.
A. I don’t think a home equity loan makes much sense. Interest rates on home equity loans can usually be adjusted every quarter; if interest rates increase your required monthly payment will also increase. If you determine you can’t keep up with the payments there is no guarantee your home will sell quickly and at a high enough price to enable you to pay the line off and have enough cash to buy a smaller place.
There is a relatively new reverse mortgage available that may be ideal for someone in your situation. The federally insured Home Equity Conversion Mortgage, or HECM Saver, allows you to establish a credit line but not draw on it until funds are needed. You can chose when to make interest payments including deferring any payments until your home is sold. When your home is sold, you pay off the balance of the loan, and the proceeds are retained for you or your estate.
The HECM Saver is less expensive than a standard reverse mortgage, but the amount of money available to you is lower. The amount of the initial mortgage insurance premium is 0.01 percent of the maximum claim amount. The claim amount is the lesser of the sales price, appraised value or Federal Housing Administration (FHA) mortgage limit of $625,000. With the standard HECM the initial mortgage insurance premium (MIP) is 2 percent of the maximum claim amount, but you can borrow a larger amount of money based on the equity in your home. According to the National Reverse Mortgage Lender’s Association, HECM Saver will give you approximately 10-18 percent less money than the HECM standard. Over the life of the loan you will also be charged an annual MIP equal to 1.25 percent of the loan balance.
Both the HECM Saver and the standard HECM allow you to keep the title to your home. Both are a way to turn the equity in your home into cash. Payments can be taken in several ways. They may be taken as a line of credit, a lump sum, monthly payments for a specified number of years, or payments for the life of the borrower. The selected payment method will have a major impact on the amount of money you will receive. The amount of cash or credit line you will receive will depend on your age, the value and location of your home, current interest rates, origination fees, settlement costs and the reverse mortgage program you select. Higher cash amounts go to older borrowers owning high value homes and lower cash amounts to younger borrowers living in modestly priced homes.
To qualify for this type of loan, all borrowers in the household must be at least 62 years old and the home must be totally, or nearly, paid off. Usually the home must be your principal residence; this requirement is met if you live there more than half the year. You must also participate in a consumer information session given by a HUD approved HECM counselor.
You can search on-line for a counselor or call 800-569-4287.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 99466, Raleigh, NC 27624