A reverse mortgage is a loan for homeowners age 62 and older that requires no monthly mortgage payments. The loan is repaid when the borrower passes away, leaves the home permanently or sells. Funds available are distributed as a lump sum, line of credit or structured monthly payments.
What a Reverse Mortgage is:
- A loan against your home’s equity
- A loan with no required monthly mortgage payments
- A loan designed to meet the needs of retirees on fixed incomes
- Tax-free cash for virtually anything (social security income supplement, long-term care payment, house repairs or even vacations)
What its NOT:
- Selling your home to the bank
- Relinquishing title or ownership rights
- Right for everyone
The most common type of reverse mortgage is the Home Equity Conversion Mortgage, or HECM, a program the Federal Housing Administration created in 1988. While a traditional home mortgage requires that you make scheduled monthly payments over a specified term — usually 30 years — reverse mortgage interest is not due until the loan reaches maturity.
A reverse mortgage is not right for everyone. But if you have a good amount of home equity built up, want to continue living in your home as your primary residence (not leaving for a period longer than 12 consecutive months) and can pay your property taxes and insurance, a reverse mortgage can give you newfound financial freedom.
The bank does not own your home. You do.
With a reverse mortgage, you continue to own your home just as before. Like any mortgage, you will receive a monthly statement outlining all interest charges and balance information. You will continue to pay your property taxes and homeowners insurance. The only difference will be the absence of a coupon to return your monthly payment. Why? Because no payment is necessary.
At any time, you are welcome to repay the interest charges partially or in full without penalty.
You’re in the driver’s seat.
Some believe that once you get a reverse mortgage the bank will eat all the home’s equity, leaving your heirs with nothing but a mound of debt. Wrong.
While no one can predict your home’s appreciation, you can rest assured that your heirs have no recourse to the reverse mortgage you took. You can choose to make voluntary repayments of the mortgage interest in part or full without penalty.
That’s right: if you want to, you can repay your reverse mortgage loan as you go. You can also deduct the interest just as you would a traditional home loan, and you can pay off the entire loan at any time with cash, refinancing or selling.
To be able to qualify to receive a standard or forward mortgage, borrowers must be able to qualify for the loans by showing adequate income and credit to make the monthly payments plus living expenses, all other debts and have funds available for unexpected needs.
A reverse mortgage operates differently in that there are no monthly payment requirements. Since homeowners are not required to make payments on the loan, any interest that accrues on the balance is added to the loan balance. In this manner, the loan operates in reverse of the typical forward loan and is a rising debt, falling equity loan.
With Financial Assessment, HUD now wants to see that reverse mortgage borrowers do have the ability to pay their taxes, insurance and have enough money to live every month and uses a small residual income that borrowers must have after all property charges are considered.
Aside from these requirements, you must also reside in the property as your primary residence, you cannot move out and rent the home while retaining a reverse mortgage.
Required HUD counseling
The Federal Housing Administration wants you to fully understand the reverse mortgage and requires all applicants to receive independent third-party counseling by phone or in person. Once you’ve received the counseling, you will receive a certificate of completion which is then signed and delivered to your lender of choice.
Common Questions & Considerations
How much can you get?
Reverse mortgages are available to all U.S. citizens and Permanent Residents age 62 or older with substantial equity in their home. The maximum loan amount you may qualify for is based on the youngest homeowner’s age, current interest rates, and home value. Because this is a loan based on life expectancy, the amount of money you may borrow starts at roughly 50% of your home value at age 62 and increases slightly for older homeowners.
Is a reverse mortgage right for you?
Anyone who has desires or needs that cannot be met with their current income levels might be right for a reverse mortgage. It is a great tool to help you stay in the home you love or to simply enhance your retirement years.
Who is it NOT for?
Because there are typical costs associated with setting up a reverse mortgage, (appraisal and origination charges), the loans are not recommended for homeowners who plan to move within a few years — such as people who might require imminent care in a nursing home or inpatient facility — as they won’t be able to fully realize the benefits of the loan.
Is there a Prepayment Penalty?
Unless you repay your mortgage voluntarily as you go, your loan is not due until the last surviving spouse passes away or until that borrower no longer occupies the property as their primary residence. Your heirs will have ample time (up to 12 months) to complete a sale or refinance the transaction to repay the balance of the loan.
If your heirs choose not to act, the reverse mortgage lender will have no choice but to foreclose on the home. If the sale of the property does not yield sufficient funds to pay off the balance of the loan, the government insurance that you would have paid for as part of closing your reverse mortgage loan will cover your estate. The lender will be reimbursed for any shortfall from the mortgage insurance fund.
What about income taxes?
Cash received by any mortgage is not considered income and will not be taxed.
Will it affect Social Security or Medicare?
Even though reverse mortgages do not affect public benefits such as Social Security and Medicare, the cash proceeds can impact eligibility for those who are receiving “needs-based” state or local assistance. This is not specific to a reverse mortgage, as any excess funds can change the qualifications on these types of programs.
What are the qualifications?
In 2014, the FHA introduced “Financial Assessment” to the reverse mortgage program, which requires lenders to check a borrower’s ability to repay their ongoing obligations, such as property taxes and homeowners insurance. If within the past 24 months you have had no serious late payments on property charges or other consumer credit and make enough income to reasonably maintain your taxes and insurance, you should not have a problem qualifying for a reverse mortgage.
How can you get started?
Like any mortgage, you’ll benefit, but it pays to shopping around. Compare offers from both banks and brokers alike and don’t be fooled by the common sales pitches that, “They’re all the same” or, “We service our own loans.”
If you’re not quite ready for this step, we recommend you request your proposal package, which will include our professional presentation including your personal loan details, our expert recommendations and important pre-counseling documents.
The fact of the matter is there is only one federally insured HECM. So, don’t settle for less money or higher interest charges, and call us today!
We’re here to answer your questions! If you’d like to know what a reverse mortgage can do for you, call our experts Toll Free (800) 565-1722 or try ARLO™ – our revolutionary calculator to compare your loan options and personal recommendations.
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