If you’re a homeowner, the thought of refinancing your mortgage has likely crossed your mind over the past few months—for good reason. With interest rates reaching record lows (the lowest in nearly 50 years!), millions of Americans have expressed interest in refinancing their mortgage to save money1, especially given today’s volatile market environment. As a matter of fact, residential refinance mortgages in the second quarter of 2020 increased 50% over the first quarter, and more than 100% over the second quarter of 20192.
While homeowners have traditionally turned to refinancing to decrease their monthly mortgage payments to a more manageable amount, the reality is that the days of doing so may be numbered. With anticipated refinance fees slated to go into effect December 2020, homeowners looking to refinance their forward mortgages will soon face a big new fee. Under mortgage giants Fannie Mae and Freddie Mac, all home mortgages that are refinanced will require borrowers to pay 0.5% of the loan. While this small percentage doesn’t seem significant, it adds up to more than you may initially think. On the average $300,000 mortgage, this new fee equates to an additional $1,500 out of the borrower’s pocket1.
Fortunately, if you’re spending more than you’d like to on monthly mortgage payments, there is another option—a Home Equity Conversion Mortgage (HECM), or reverse mortgage. Available to homeowners ages 62 and older, a reverse mortgage allows you to access a portion of the equity in your home to use as you wish. The money from the HECM is first used to pay off your existing mortgage in full—and since no monthly mortgage payments are required on the HECM, you can eliminate that expense and keep more cash to use as you see fit. So how, exactly, does a reverse mortgage stack up against a standard forward mortgage refinance?
No monthly mortgage payments required
Yes, you read that correctly—under the reverse mortgage, there are no monthly mortgage payments required*. Unlike a traditional forward mortgage—where the borrower must begin repaying the loan right away—you don’t have to repay the funds received through a reverse mortgage for as long as the home remains your principal residence*. Or, if you prefer to make payments, you can pay as little or as much as you want, as often as you want. Instead of making regular payments to your bank or lender, with a reverse mortgage, the lender pays you—tax free—with a series of payments via a lump sum, monthly payout, or line of credit.
You maintain title & ownership of the home
Despite common misconceptions, a reverse mortgage allows you to maintain title and full ownership of your home, just as you would with a traditional forward mortgage or refinance. The lender simply adds a lien onto the title of your home so that they can guarantee they will eventually receive loan repayment once terms of the loan are no longer met.
Non-recourse loan protection for your heirs
Unlike traditional forward mortgages, reverse mortgages are non-recourse loans. But what exactly does this mean for you and your heirs? Because a reverse mortgage is a “non-recourse” loan, you’ll never owe the lender more than the home is worth at the time of its sale. The fees on your reverse mortgage include a payment for insurance that ensures you’ll never owe more than your home’s fair market value when the home is sold and the loan is repaid.
If you leave your house to your heirs as an inheritance, the loan must be repaid—again, most often this can be done by simply selling the home and using the proceeds to pay off the loan. This way, even if the loan balance exceeds the value of the home when the loan is repaid, your heirs won’t have to cover the difference. That’s one of the protections supplied by government-insured reverse mortgages. If your heirs don’t want to sell the home, they could pay off the loan, using other sources of funds. Or buy the home for 95% of the current appraised value.
As the saying goes, “what goes up, must come down.” As refinancing demand reaches record highs, the additional fee consumers must face come December 2020 has the potential to decrease the surge in refinances, if not halt it altogether. Luckily, if you’re looking to spend less on mortgage payments—or even eliminate them altogether—a reverse mortgage is a viable alternative.
With a recent study finding that 94% of reverse mortgage borrowers enjoyed improved peace of mind as a result of the loan3, it (literally) pays to consider tapping into your home equity. Want to see just how much money you can get? Check out our reverse mortgage calculator or contact the Longbridge team to see if a reverse mortgage is right for you.
- Source: 2010 NRMLA study.
* Real estate taxes, homeowners insurance, and property maintenance required.