How is a reverse mortgage different from a “Regular” Mortgage?
A reverse mortgage is essentially the reverse of a traditional "forward" mortgage. Instead of making monthly payments, you can choose to receive them. That's the "reverse" part of a reverse mortgage. Instead of turning your debt into equity by making payments on your forward mortgage, you turn your equity into debt by converting the equity you have into available funds. Rather than paying down a balance, you are creating a growing balance against your home.
How is a Reverse Mortgage different than a Home Equity Loan?
Both a reverse mortgage and a home equity loan use the equity you have built up in your home to provide you with readily available cash. They differ in that with a home equity loan you must make regular monthly payments of principal and interest. However, with a reverse mortgage you do not make any required monthly mortgage payments for as long as you stay in the home.
Am I eligible?
To be eligible for a reverse mortgage, all owners listed on the home's title must be at least 62 years of age and occupy the home as their principal residence for the majority of the year. The property must be a single-family or a one-to-four unit owner occupied dwelling. Townhomes, detached homes, condominium units, planned unit developments (PUDs), and some manufactured homes or new construction properties are eligible.
What If I Have An Existing Mortgage?
You may qualify for a reverse mortgage even if you still owe money on an existing mortgage. However, the reverse mortgage must be in a first lien position, so any existing indebtedness must be paid off. You can pay off the existing mortgage with a reverse mortgage, money from your savings, or assistance from a family member or friend.
Would a home that is in a “living trust” be eligible?
Yes. In most cases a homeowner who has put his or her home in a revocable living trust can usually take out a reverse mortgage. A review of the trust documents would be conducted by the reverse mortgage lender to determine if anything in the living trust would be unacceptable.
How is the loan repaid?
No monthly payments are due on a reverse mortgage while it is outstanding. The loan is repaid when you cease to occupy your home as a principal residence, whether you (the last remaining spouse, in cases of couples) pass away, sell the home, or permanently move out.
The amount owed can never exceed the value of your home. Furthermore, if the home is sold and the sales proceeds exceed the amount owed on the reverse mortgage, the excess money goes to you or your estate.
The borrower retains title to the property. The reverse mortgage lender is merely extending a loan to the borrower. Because the homeowners retain title, you remain responsible for the payment of property taxes, hazard insurance, and maintaining the home in reasonable condition - just as you would with a standard first mortgage or home equity loan.
Will I still have an inheritance to pass on?
Whether you tap into your home equity with a reverse mortgage or through some other financing program, the more of that equity you spend now, the less will be left for your heirs. That's why it is important to think about how you want to involve your children or other loved ones in the process.
When you sell your home or no longer use it as your primary residence, you or your estate must repay the lender for the cash received from the reverse mortgage, plus interest, monthly service fees and any other accrued costs. Any remaining equity belongs to you or your heirs. It's important to remember that you can never owe more than the fair market value of the home when it is sold. None of your other assets will be affected by your reverse mortgage loan.
Are all reverse mortgages the same?
No, this page refers to Federally-insured reverse mortgages known as Home Equity Conversion Mortgages (HECM). They are insured by the U.S. Department of Housing and Urban Development (HUD) but are not a federal government loan offering. They are widely available, have no income requirements, and can be used for almost any purpose. There are no limitations on how you spend your loan proceeds.
Will I ever owe more than my home is worth?
A HECM is a non-recourse loan. A non-recourse loan is a home loan in which a lender may look only to the value of the home for repayment of the loan; no other assets may be attached if the loan balance grows beyond the subject property home value.
If the borrower or heirs/estate do not wish to retain ownership of the property upon loan maturity, the borrower or heirs/estate will not be required to pay more than the home is worth upon loan maturity.
In the event the borrower or heirs/estate decide to keep the home upon loan maturity, the borrower or heirs/estate will be responsible for the full amount owed.
How Much Money Can I Get?
The amount of funds you are eligible to receive depends on your age (or the age of the youngest spouse in the case of couples), the appraised home value, interest rates, and in the case of the HECM government program, the lending limit in your area. In general, the older you are and the more valuable your home (and the less you owe on your home), the more money you can get.
What are My Payment Plan Options?
You can choose to receive the money from a reverse mortgage all at once as a lump sum, fixed monthly payments either for a set term or for as long as you live in the home, as a line of credit, or a combination of these. The most popular option - chosen by more than 60 percent of borrowers - is the line of credit, which allows you to draw on the loan proceeds at any time.
My Understanding is that the Unused Balance in the Line of Credit Option Has a Growth Feature. Does that Mean I’m Earning Interest?
No, you’re not earning interest like you do with a savings account. The growth factor, which is equal to roughly the interest that you’re being charged, takes into consideration that your home has appreciated in value over the past 12 months and that you are one year older.
What are the upfront costs?
There are upfront fees due at the time of loan closing. These can also be added into your balance and paid when the loan comes due. In general the upfront fees include general third party fees such as the appraisal, title fees, and escrow, an origination fee paid to the lender which is based on your homes vale and can range from $2500 - $6000, and a Mortgage Insurance Premium Fee (MIP) which is an initial fee paid to HUD (which is 2% of your homes value).
Are there other costs?
Yes, added to your balance and due when the loan is due are also interest, 0.5% annually for a Mortgage Insurance Premium, and Servicing Fees.
How Does the Interest Work on a Reverse Mortgage?
With a reverse mortgage, you are charged interest only on the proceeds that you receive. Most reverse mortgages charge a variable interest rate (although fixed rate products are available as well) that is tied to an index, such as the 1-Yr. Treasury Bill or the London Interbank Offered Rate (LIBOR), plus a margin that typically adds an additional one to three percentage points onto the rate you’re charged. Interest is not paid out of your available loan proceeds, but instead compounds over the life of the loan until repayment occurs.
The Fixed rate option is available; however you are limited to taking all available proceeds up front as a lump sum.
There are two types of adjustable rates:
Annually adjustable rates are usually capped at two points per year and five points over the life of the loan. On the other hand, they provide a lower maximum loan amount.
Monthly adjustable rates feature a larger maximum loan amount, but they usually have no annual adjustment cap, and instead are capped at ten points over the life of the loan.
Can I “lock” in my interest rate?
Although a lender may be able to lock in the index rate, the lenders margin (which makes up the majority of the interest rate) is still able to change based on the Secondary market. Loans are funded by companies such as FannieMae and due to something called “live-pricing” the margins required of a lender may change with little notice and no control of the lender. This may make you eligible for substantially more or less proceeds than the “Good-Faith Estimate” provides at the time of closing. Once you close the loan, these margin changes will not affect your proceeds or your loan.
What Is the Service Fee Set-Aside?
Under the FHA HECM program, you are charged a monthly servicing fee that ranges from $30-$35 to manage your account once the loan closes. The SFSA is an estimate of what the total servicing fees will be over the life of the loan, by multiplying your life expectancy (converted from years into months) multiplied by either $30 or $35.
Although it’s not considered a closing cost, the SFSA can equal several thousand dollars, which is deducted from your available loan proceeds. You do not have access to that money, nor do you earn interest.
Will a reverse mortgage affect my public benefits or taxes?
The IRS currently treats reverse mortgage proceeds as loan advances rather than as taxable income. You may encounter tax implications based on how you use your proceeds so you should check with your tax advisor regarding your vulnerability.
Proceeds from a reverse mortgage will have no affect on Social Security or Medicare benefits because they are not need-based. Benefits such as SSI and Medicaid, however, may be affected if you carry any of your reverse funds over from one month to the next. You should check with your local Area Agency on Aging or your local benefits program administrator to find out if you are in danger of becoming ineligible.
What is TALC and why should I know about it?
TALC is short for "Total Annual Loan Cost." It combines all of the costs of a reverse mortgage into a single annual average rate and can be very useful when comparing one type of reverse mortgage to another. If you are considering a reverse mortgage, be sure to ask the lender to explain the TALC rates for the various reverse mortgage products.
Can I refinance a reverse mortgage?
Yes. Refinancing is possible if your home either increases in value, the interest rates drop or the maximum lending limit increases. Keep in mind that when deciding to refinance a reverse mortgage, it is important to compare the amount of benefit versus the cost of the loan before making this decision. The amount of benefit received should be twice the amount of the cost to refinance the loan.
Why Do I Need to Get Counseling?
Counseling is one of the most important consumer protections built into the program. It requires an independent third-party to make sure you understand the program, and review alternative options, before you apply for a reverse mortgage.
You can seek counseling from a HUD-approved counseling agency, such as Spectrum Generations. Counseling is required for all reverse mortgages and may be conducted face-to-face or by telephone. By law, a counselor must review (i) options, other than a reverse mortgage, that are available to the prospective borrower, including housing, social services, health and financial alternatives; (ii) other home equity conversion options that are or may become available to the prospective borrower, such as property tax deferral programs; (iii) the financial implications of entering into a reverse mortgage; and, (iv) the tax consequences affecting the prospective borrower’s eligibility under state or federal programs and the impact on the estate or his or her heirs.
Under What Circumstances Should I Not Consider a Reverse Mortgage?
Because of the upfront costs associated with a reverse mortgage, if you intend to leave your home within 2-3 years, there may be other less expensive options to consider, such as home equity loans, no-interest loans or grants that may be offered by your county government or a local non-profit to repair your home, or a tax deferral program, if you’re having problems paying your property taxes. Also, if you want to leave your home to your children, then you should consider other options, because in many cases, the home is sold to pay back a reverse mortgage.
How much equity will be left when the loan is due?
How much of your home's equity will be left after repaying the loan depends on many factors: the size and frequency of your loan advances, increases or decreases in your home's value, future interest rates, and others. Because so many variables are involved, no estimate will be absolutely certain. Make sure to closely review and fully understand any financial examples given to you.
Additional Information may be found at the following websites: www.reversemortgageguides.org/reverse_mortgage/articles
www.reversemortgageguides.org/reverse_mortgage/when_is_a_reverse_mortgage_a_bad_idea
www.reversemortgageguides.org/reverse_mortgage/pros_and_cons