A Reverse Mortgage Defined
A reverse mortgage is a special type of loan used by senior homeowners to convert part of the equity in their home into cash or tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. The money from a reverse mortgage can provide seniors with the financial security they need to enjoy their retirement years to the fullest.
The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular first mortgage or home equity loan, a lender makes payments to you. While a reverse mortgage loan is outstanding, you continue to own the home.
You Will Never Be Forced Out of Your Home
Borrowers will never, under any circumstance resulting from the reverse mortgage, be forced to leave their homes providing they pay their real estate property tax and insurance premiums.
Borrowers can choose to receive the reverse mortgage funds as a lump sum, monthly income (for up to life), or a line of credit, or as a combination of monthly income and line of credit. No mortgage payments are due during the life of the loan. Borrowers can use the funds anyway they wish. Borrowers make no monthly payments on a reverse mortgage during its term. The loan becomes repayable when the borrower sells the home or permanently moves out. In addition, the repayment amount can’t exceed the value of the home.
What can the Money Be Used For?
The money from a reverse mortgage can be used for ANYTHING, including the following:
- Daily living expenses
- Home repairs and home modifications
- Medical bills and prescription drugs
- Pay-off of existing debts
- Continuing education
- Long-term health care
- Prevention of foreclosure, and other needs.
If your home needs physical repairs (mandatory repairs) in order to qualify for a reverse mortgage, a portion of the proceeds will be set aside for this purpose.
To qualify for a reverse mortgage, you must be at least 62 years old and own your own home. There are no income or medical requirements to qualify. You may be eligible for a reverse mortgage even if you still owe money on a first or second mortgage. In fact, many seniors get a reverse mortgage to pay off a first mortgage.
Options on How to Receive Money from a Reverse Mortgage
- All at once (lump sum)
- Fixed monthly payments (for up to life)
- A line of credit
- A combination of these
- The most popular option – chosen by more than 60% of borrowers – is the line of credit, which allows you to draw on the loan proceeds at any time
The size of the reverse mortgage you can receive depends on:
- Your age at the time you apply for the loan
- The type of reverse mortgage you choose
- The value of your home
- Current interest rates
- And – sometimes – where you live.
In general, the older you are and the more valuable your home (and the less you owe on your home), the larger the reverse mortgage can be
What Costs are Associated With a Reverse Mortgage?
They include the origination fee (which can be financed as part of the mortgage), an appraisal fee, and other charges similar to those for regular mortgages.
The money provided to you from a reverse mortgage is tax-free, and does not affect regular Social Security or Medicare benefits. However, the funds received from a reverse mortgage may affect your eligibility for certain kinds of government assistance, such as Medicaid or state assistance programs. So, you should check into this before getting a reverse mortgage. To do this, you may wish to consult with your local Area Agency on Aging (to locate, call 1-800-677-1116, or visit http://www.www.eldercare.gov), a reverse mortgage lender, or a tax attorney.
Reverse Mortgage Disadvantages:
#1: The money you get from a reverse mortgage is not free money. All banks and lenders are in business to make money. A reverse mortgage lender is no different. When they lend you money that is secured by a mortgage on your home, they are entitled to be repaid what they lent you, plus the interest on it. But, in the case of a reverse mortgage, the lender must wait for payments of any kind until you sell the home, refinance, or permanently leave the home (i.e. pass away). It is a business transaction: you get the money, the lender gets a guarantee that they’ll eventually be repaid.
#2: If you get a reverse mortgage, you will have less equity in your home than if you did not get one. A reverse mortgage enables you to access a portion of your home equity. Your home equity is the difference between the value of your home and how much (if any) you owe on it. If you take out money from you equity, then you’re going to have less of it in the future. Of course, with a reverse mortgage, interest is also added to your loan balance, which also reduces your home equity. This is not necessarily a bad thing, it is just a trade-off. Ask a reverse mortgage lender for an amortization table to see how much less equity you will have in the future. This way you can decide if the money you’ll get from a reverse mortgage is worth the tradeoff of less equity in the future.
#3: Reverse mortgages are more expensive than traditional home loans. The reverse mortgage lender, not you, is taking on the risk that you live to be 100 years old because, for that entire time, they cannot ask for a payment from you. That is a big risk for the lender and so like any good investor, they must get an increased return on their money (that they lend to you) in exchange for the greater risk. Traditional mortgage lenders start being repaid from the first month after the loan is obtained. Reverse mortgage lenders must wait for many, many years for repayment of any kind. So, they either get a
higher interest rate and/or they charge higher closing costs, often in the form of FHA insurance, to cover their risk.
#4: Your friends or advisors may call you crazy. “You’ll lose your home! You’re giving it to the bank. It’s a rip off. Bad idea. You’ll regret it. They’re only for poor people. Only if you have no heirs.” Many myths and misperceptions, however vague and unfounded they might be, abound with reverse mortgages, causing normally sensible people to erupt with objections at their mention. While it is true that the program is not for everyone, if you have some reason for considering it, then the smartest approach is to investigate it for yourself and then decide. Get the truth about reverse mortgages, as the knowledge will enable you to make a rational, well-informed decision about whether the program is right for you and your circumstances. Otherwise, you
will be subject to the tyranny of know-it-all naysayers who have no real knowledge, just uninformed opinions that could stand in the way of potentially valuable income, cash reserves or debt relief that a reverse mortgage could provide.
#5: Reverse mortgage sales people. Many have no idea what they are talking about. They have to “get back to you” almost every time you ask a question, or their answers sound suspect or inconsistent. Many of these people are one step up from used-car salesmen. They’ll say and do anything to get the sale, up to and including using bait-and-switch and high-pressure sales tactics. How do you spot them? Look for the words “discount” or “lowest price” in their advertising. You get what you pay for in this world. If you want bottom-of-the-barrel rates and fees you will usually have to go bottom fishing among the lenders. For most people however, the potential of saving a few bucks is not worth the risk to their health or their wallet when they end up a victim of the bait-and-switch. Use a reputable reverse mortgage lender who gives you solid answers to your questions and does not try to entice you with the promise of the lowest price.
#6: You usually need a lot of equity to qualify for a reverse mortgage. Reverse mortgage lenders do not offer you the full amount that your house is worth – after all, they’re not buying your home. They need to leave plenty of room for interest to be added to the principle balance of the loan, so that it will not get too close to the value of the home in the future. After they do the math, this means that reverse mortgage lenders will usually only offer between 30% and 80% of the value of your home (80% is very rare). The exact amount depends on your age and which program you choose. Since reverse mortgages must first pay off any existing mortgages, if you have one that exceeds the amount you qualify for, then you will need to make up the difference using your savings. No, you can’t go get a home equity line of credit or a second mortgage to do this – that would further decrease your home equity. If you don’t have enough money bring your current mortgage balance below the maximum amount that you could get from a reverse mortgage, then you do not qualify.
#7: A reverse mortgage may not be the singular, ultimate, all-encompassing answer to your financial goals. You do not have unlimited amounts of home equity and a reverse mortgage does not change that. It is merely a means of tapping into the home equity that you do have. You will qualify for a given amount of money upfront. Once you use up that money, it is gone, although you will not owe any monthly payments. If you are concerned about running out of money, then you should choose the tenure income option, which guarantees you a monthly amount. It is also important to note that if your home appreciates at a high pace, you may be able to refinance your reverse mortgage and get more money in the future. A reverse mortgage may provide all the money that you will
need for the rest of your life. Or it may just help. Find out by obtaining a reverse mortgage quote from a lender you trust.
Before applying for a reverse mortgage, you must first meet with a reverse mortgage counselor. You may, however, first approach a reverse mortgage lender, who can provide you with the names of approved counseling agencies in your area. A list of approved counseling agencies nationwide is posted on the Internet by the U.S. Department of Housing and Urban Development. http://www.hud.gov/buying/rvrsmort.cfm
The counselor will educate you about reverse mortgages, and inform you of other alternative options given your situation, as well as assist you in determining which particular reverse mortgage product best fits your needs.
No payments are due on a reverse mortgage while it is outstanding. The loan becomes due and payable when you cease to occupy your home as a principal residence. This can occur if you (the last remaining spouse, in cases of couples) pass away, sell the home, or permanently move out.
Where can I get a Reverse Mortgage?
They are offered by banks, mortgage companies, and other financial institutions.
In the U.S., the most popular reverse mortgage is the federally-insured reverse mortgage, called the FHA Home Equity Conversion Mortgage Program (HECM). The other major product is the Home Keeper reverse mortgage, developed in the mid-1990s by Fannie Mae, a private national mortgage company. One “jumbo” private reverse mortgage product, designed to accommodate seniors living in higher-priced homes, is offered by Financial Freedom Senior Funding Corp. of Irvine, CA. This is the Cash Account Plan. The HECM and Home Keeper products are available in every state, while Financial Freedom’s product is offered in 21 states and the District of Columbia.