If you are finding that your aging-in-place is becoming a financial challenge, the answer may well be found under your very roof.
The federal housing authority (FHA) has recently revised an older mortgage program that originally was designed for seniors but proved to have too many drawbacks that negatively affected the users. The new government-insured program is now known as the Home Equity Conversion Mortgage (HECM) and is only available through FHA.
The new program has been designed to offer a safe source of mortgage monies to seniors (62 and over) who own their own home, have no more than a small existing mortgage on the home, plan to age-in-place at that location and agree to one counseling session with an HECM-approved counselor to verify you fully understand the pros and cons of the program. The owners must further agree to maintain the property so that the appraised value does not significantly decrease; pay current property taxes; keep home insurance in effect and pay any Home Owners’ Association fees that may apply.
The major difference between the HECM loan and other home equity loans is that no monthly payments of principle and interest are due. With the HECM loan, the mortgage balance including interest is paid off when the owner or owners no longer live in the home or both have become deceased. The home is sold, the loan paid off and the cash remaining goes to the estate or heirs. If for some unusual reason the sale proceeds do not cover the mortgage balance, the mortgage insurance premium (MIP) pays the shortfall to the lender with no debt transferred to the estate or heirs.
Here are possible purposes for securing a HECM loan:
Pay cost of maintaining home such as roofing, painting, door and window replacement; replacement of hot water tank; furnace and air conditioning; laundry appliances; and kitchen appliances. Surveys indicate that about 1.5 percent of the homes’ value, if in good condition, per year set aside for repair and replacement is reasonable.
Pay for property taxes, insurance, HOA fees, exterior yard maintenance and snow removal.
Pay for medical bills, home modifications, medical insurance, medications and auto expense.
To supplement your current social security and retirement funds for normal living expenses. There are no restrictions as to how one must use the monies; however, one must look at how long the loan will last if used on a regular basis and if those are the only funds available for that use.
Remember if you have any existing mortgage on your home it will be paid off from the HECM proceeds, thus eliminating any additional monthly outlay for principle and interest for that former mortgage.
How monies can be received:
Equal monthly payments
Line of credit drawing out monies as needed
Single disbursement.
Combination of those above.
Closing cost of HECM (approximate):
Appraisal of home: $300 to $500
Initial mortgage insurance premium: 2.5 percent of loan
Over life of loan: 1.25 percent of mortgage balance
Loan origination fee if home value less the $200,000: 2 percent of appraised value
Servicing fees throughout life of loan (varies depending upon disbursements)
Closing costs to title company: $300 to $500
Note: Above closing costs can be deducted from loan if desired
How loan amount is figured: The maximum loan amount is quite complex in projecting as the following conditions apply
The age of the youngest owner (the older the age the higher the loan amount)
The home’s appraisal
The current interest rate
Any current mortgage on the property is deducted as it is paid off out of the loan amount.
Prior to borrowing any money from any source it is best to carefully look at your monthly cash outflow to see if any money can be saved from other expenses. We recommend a written budget at the beginning of each month to carefully allocate your funds. If you have any questions or comments regarding this information please contact me at [email protected].
Dean McFarland is a board member for the Central Indiana Council on Aging.
