Home Equity Loans
Home equity loan is a non-performing loan secured by real estate, a mechanism to support retirees through the monetization of their homes. In the United States, mortgage insurance is provided by the Federal Housing Administration (FHA). The loan is issued by an FHA approved bank.
Home equity loan allows seniors to get a lifetime loan secured against their property while retaining ownership. At the same time, there is no need to pay monthly interest on the loan: they are charged and added to the debt. After the borrower death, the bank sells the housing and returns the funds along with interest, and transfers the remaining amount to the heirs. This loan is canceled if the home is empty for more than 12 months. The loan can be repaid by the heirs of the borrower: if they pay off the entire debt, they will become the owners of the real estate.
To find out if a retiree is eligible for this loan type, he/she should contact a HECM advisor. To find a specialist, visit the Department of Housing and Urban Development (HUD) website.
General requirements for borrowers
- Age at least 62 years old;
- no tax and insurance debts, good credit history;
- real estate is used as the primary home: the borrower must live in the house or apartment for at least 6 months a year;
- the presence of direct ownership (if the property was purchased on credit, the debt can be repaid by means of a reverse mortgage);
The following types of real estate can be provided as a security:
- a 2–4 apartments’ house, one of which is occupied by the borrower;
- HUD-approved condominium;
- prefabricated house that meets the requirements of the Federal Housing Administration.
The loan amount can be calculated using a special calculator. The loan amount depends on:
- borrower’s age;
- current interest rate;
- whichever amount is less – the appraised value, market value or loan threshold of $ 625,000;
- initial mortgage insurance premium.
Next, the pensioner needs to apply to the bank for a reverse mortgage. A list of FHA approved lending institutions can also be found on the HUD website.
Home equity loan costs
- Initial mortgage insurance premium: 0.1% (under the HECM Saver program) or 2% (HECM Standard) of the assessed value, market value or limit of $ 625,000;
- Payment for intermediaries: appraisal, due diligence, insurance, registry fees, mortgage fees, credit checks, etc .;
- Bank commission for arranging a loan (Origination Fee): up to $ 2,500 if the house costs less than $ 125,000; the maximum commission amount is $ 6,000;
- Servicing Fee – $ 30-35 per month.
Loan funds can be spent on any needs – daily expenses, medical services, repairs, travel, etc. A pensioner can get a loan both as a lump sum and in parts (for example, monthly). Funds received from this type of loan are not considered taxable income and do not affect participation in government social and health insurance programs. If money remains in the bank account at the end of the month in which it was received, and the total amount exceeds the state benefit, the pensioner loses the right to participate in such programs.
Besides the US, such a loan is spread in Australia and the UK. Apart from traditional mortgages and consumer loans, there is another alternative – life annuity. Its disadvantages compared to a reverse mortgage are that the tenant transfers ownership of the property to the lender and loses the opportunity to leave the property to the heirs.