ParentCare » Vol. 8

Your Home is Your Castle

Can It Also Be Your Bank?

By Frederick M. Misilo, Esq.


While people’s homes are sometimes called their castles, the financial industry points out in its advertising that a home can also be a bank. Pick up the paper, turn on the radio or go into your local branch bank and you’ll be assured that the equity in your home represents easy access to cash.

Especially for persons who are on a fixed income and who have seen their retirement accounts or mutual fund account balances plummet in recent months, turning their home equity into cash for immediate use is very appealing.

So what are the choices?

Reverse mortgages have become a popular option. These mortgages have evolved greatly since their inception. They are now regulated by the U.S. Department of Housing and Urban Development (“HUD”) and are subject to certain limited consumer protections including state and federal regulation. Simply stated, a reverse mortgage is a special type of home loan that does not require repayment until the borrower no longer uses the home as a principal residence. This typically occurs when the borrower dies, sells the home, or moves out of the residence. The loan proceeds can take the form of a lump sum, equal monthly payments for life or for a fixed period of months, or a combination of these options. The amount that can be borrowed depends on your age, current interest rate, fees, and the appraised value of the home or HUD’s Fair Housing Administration (“FHA”) mortgage limits in your area, whichever is less.

To be eligible for a HUD reverse mortgage, you must be a homeowner, 62 years of age or older, own the home outright or have a mortgage loan balance that can be paid off with the proceeds from the reverse loan and you must also live in the home. There are no income requirements for a reverse mortgage. However, just like any other home loan, you are also required to maintain home insurance, pay real estate taxes and utilities supplied to the home. The loan is repaid when the borrower dies, sells the home, or no longer uses it for a primary residence. The amount that is repaid is the cash received from the reverse mortgage, plus interest and bank fees. The bank fees paid can be substantial when compared to other home loans. These fees must be disclosed to the homeowner as part of the loan application process.

More familiar types of home loans include a home equity line of credit (sometimes called a “HELOC”) and a fixed home equity loan. A HELOC is a mortgage loan that operates more like a credit card than a traditional loan. It has a revolving balance. A typical HELOC has a draw period ~ normally five to ten years ~ during which the borrower has access to a pre-determined amount of equity in their home. The HELOC also has a repayment period varying from ten or fifteen years, depending on the terms of the loan. Most HELOCs have a variable rate of interest and most can be prepaid in full or in part without penalty. A fixed home equity loan is a one time lump sum paid over a period of time and most often can be repaid in full without prepayment penalty.

When deciding which option to choose, a homeowner should determine what his or her current objectives are. If there is a one-time need for a modest amount of money for a renovation project such as a new furnace, replacement windows or new carpeting, perhaps a HELOC or a fixed home equity loan may be appropriate so long as the monthly loan payments can be handled without too much of a problem. If there is a concern about paying on-going living expenses or if home care is needed to remain living in the home, perhaps a reverse mortgage may be appropriate so long as the homeowner understands the implications. In fact, since September 2003, the National Council on Aging, in its “Use Your Home to Stay at Home” project, has encouraged older Americans to learn about the use of reverse mortgages to help pay for long-term care services at home.

I encourage homeowners to shop around for the best rate on any of these products. Many banks and mortgage companies offer different products and there can be significant differences in overall cost between them. Also, you should make sure that you understand the fees and expenses you will be charged with any of these products. As with any major decision, don’t be impulsive and seek out an independent advisor to weigh your options.

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