As noted in the previous articles in this series, the financial crisis has made the Home Equity Conversion Mortgage (HECM), insured by the Federal Housing Administration, the only reverse mortgage in the market. Yet the HECM has been strengthened by higher loan limits and new options, offering valuable opportunities to many, though not all, seniors.
Characteristics of Seniors Who Should Look Into HECMs: They must be 62 or older and occupy the home as their permanent residence.
They have significant equity in their homes, meaning that their mortgage is either paid off or is small relative to the value of their property, but their income and financial assets are not large enough to meet all their needs.
They either intend to stay in their current home indefinitely, or they want to move to a different home immediately, using a reverse mortgage in the process, and remain there indefinitely. (Note: HECMs that terminate within a few years are very costly).
They are not uncomfortable about leaving their heirs with less (or no) equity in their homes.
A Simple Shopping Rule: Shopping for a HECM can be very difficult, or very easy. If you shop in the conventional way of compiling all the price components for each lender, the process is tedious and prone to error. Interest rates, origination fees, servicing fees and third-party charges are all costs to the borrower that can vary from deal to deal.
But there is a shopping shortcut that is close to foolproof. You shop for the largest amount of cash you can draw at the outset, which is called the "Net Principal Limit," or NPL. The NPL is the bottom line because it is reduced by higher interest rates, origination fees, third-party charges, and servicing fees. I gave an example of an NPL in last week’s column.
Just make sure that when you shop NPLs among different lenders, you give them all the same property value, age and existing debt, because these also affect the NPL. If you tell lender A that you are 72, for example, and only remember that you have a spouse of 68 when you get to lender B, you will be comparing apples and oranges. …CONTINUED