Reverse Mortgage

Reverse Mortgage
A reverse mortgage is a type of loan—available to homeowners 62 years of age or older—to convert part of the equity in your home into cash. The equity you have built up over the years of paying your mortgage payments can be paid to you and does not require selling your home or paying additional monthly bills.

What is a Reverse Mortgage?

If you are 62 years of age or older, a reverse mortgage might be a good option. A reverse mortgage allows you to convert part of the equity in your home into cash. Instead of making monthly payments to a lender, as with a traditional mortgage, the lender makes payments to the borrower (homeowner). No repayment is needed until the home is sold or otherwise vacated.

How do Reverse Mortgages Work?

As mentioned previously, you do not pay the lender every month. Instead, with a reverse mortgage, the lender will pay you. This is because reverse mortgages take part of the equity (or value) in your home and convert it into payments to you. The money is typically tax-free and you won’t have to pay it back if you continue to live in your home.

Any type of reverse mortgage loan will be borrowed against the equity in your home, and you will keep your home’s the title (unlike a title loan). The money you receive each month is usually not taxable, and typically won’t affect your Social Security or Medicare benefits (it’s best to ask your lender for further specification on any taxes).

When the last surviving borrower dies, sells the home, or no longer lives in the home as the principal residence, the loan will need to be repaid. In some situations, a non-borrowing spouse may be able to remain in the home, but it is important to ask your lender.

What are the different types of Reverse Mortgages?

Before you decide to go with a reverse mortgage, it is important to find out which type is the best option for you. There are three types of reverse mortgages available today:

  • Single Purpose Reverse Mortgages—Offered by some state and local government agencies, as well as non-profit organizations, a single purpose reverse mortgage is typically the least expensive option. This type of loan may be used for only one purpose, which the lender will specify.
  • Proprietary Reverse Mortgages—Private loans backed by companies that develop them. You might get a larger loan advance from a proprietary reverse mortgage if you own a higher-value home. If your home has a higher appraisal value and you have a small mortgage, you might qualify for more money.
  • Federally-Insured Reverse Mortgages—Also known as Home Equity Conversion Mortgages (HECMs), federally-insured reverse mortgages are backed by the U.S. Department of Housing and Urban Development (HUD). HECM loans can be used for any purpose, but may be more expensive than traditional home loans with a high upfront cost.

Pay attention to the different types of reverse mortgages, the requirements and how much money you must repay at the end.

What are the requirements of a Reverse Mortgage?

Reverse mortgage loans are a way for seniors to use their equity to age in their home. In order to qualify for a reverse mortgage, it is important to meet these specific requirements:

  • You are at least 62 years of age.
  • Your home is your primary residence.
  • You own your home outright, or have a substantial amount of equity.
  • You are not delinquent on any debt owed to the federal government.

Once you satisfy these eligibility requirements, and you have obtained a reverse mortgage, there are still other obligations you will need to uphold. To enjoy all the features of a reverse mortgage, and ensure you do not default, you will be responsible for the following:

  • Immediately using reverse mortgage loan funds to pay off any other mortgage you might have.
  • Continuing payments on your home insurance, property taxes, and basic home maintenance.
  • Complying with all terms, such as continuing to live in your home as your primary residence.

By following the requirements and obligations you can make the most out of your reverse mortgage.

How much money can I receive from a Reverse Mortgage?

The value of a reverse mortgage will depend on a variety of different factors and calculations. To determine how much you will get, the following factors will be considered:

  • Equity: The more equity you have, the more money you can take out.
  • Interest Rate: By having lower interest rates, you can get more from a reverse mortgage.
  • Age: The age of the youngest borrower on the loan will affect how much you get. The older you are, the more money you can withdraw.

It is also important to think about how you will receive the payments from your reverse mortgage. You can choose from the following options:

  • Lump Sum: This is the simplest option, as you get all your money at once. Your loan will have a fixed interest rate, and the loan balance will grow over time as interest accrues.
  • Periodic Payments: Instead of receiving your money all at once, you can choose to receive regular monthly payments that can last for your entire life. You can also receive payments for a set of time, such as 10 or 20 years.
  • Line of Credit: Instead of receiving cash, you can opt for a line of credit. This allows you to take out funds if you need them. The advantage is you will only pay interest on the money you take out.
  • Combination: If you can’t make up your mind, you can combine any of the options listed above, such as taking a small lump sum upfront and a line of credit for later. The choice is yours.

Keep your Pay equity, interest rate, age, and how you will receive payments in mind—this information can change the benefits of a reverse mortgage.

What are the costs associated with Reverse Mortgages?

As with other home loans, you will also pay interest and fees to receive a reverse mortgage. It is important to pay attention to the costs associated with reverse mortgages while also comparing several lenders. Fees are often financed or built into your loan—you don’t write a check, but you are still paying them over the life of the loan. If you can, try to pay out of pocket instead of paying interest on the fees over the years.

Some important reverse mortgage fees you will want to understand include:

  • Closing Costs: You’ll pay some of the same closing costs required for a home purchase or refinance, such as an appraisal, documents filed, and a credit review.
  • Servicing Fees: Monthly fees will eat into your monthly income from a reverse mortgage. HECM fees have maximum limits, but it is still important to shop around.
  • Insurance Premiums: HECMs are backed by the FHA to reduce the risk for your lender, which means you will pay a premium to the FHA. The initial mortgage insurance premium (MIP) is typically between 0.5 percent and 2.5 percent. You will also pay an annual fee of 1.25 percent of your loan balance.
  • Interest: As with all loans, you will pay interest on any money you take out through a reverse mortgage.

Are Reverse Mortgages a Good Idea?

It depends on who you are. A reverse mortgage might make sense if you don’t plan to move, can afford the cost of maintaining your home, or want to access the equity in your home to supplement your income or money for a rainy day. There are a lot of motivations leading into a reverse mortgage, but it is your decision.

In fact, for many retirees, reverse mortgages might be extremely beneficial—make sure you weigh the pros and cons. Some of the benefits of a reverse mortgage include:

  • A tax-free income
  • No monthly payments and no restrictions on use of proceeds
  • You can never owe more than the value of the property
  • Federally mandated—expenses and terms are consistent across lenders
  • No income or asset requirements
  • No minimum credit score
  • You can borrow between 55% and 70% of your home’s value

And, while there are many benefits of a reverse mortgage, there might be a few cons to consider as well:

  • If you move within a few years of taking out a reverse mortgage, you will need to pay fees.
  • You must pay your real estate taxes and maintain your home or the loan can default.
  • The age of 62 is firm for taking out a reverse mortgage—you won’t qualify as a couple if the younger of the two isn’t 62 years of age.

The big question is whether a reverse mortgage is right for you. Remember to consider all your options and ask questions when unsure—you may even qualify for other less costly options. Pay attention to both the pros and cons of a reverse mortgage before you take the next step. If you meet the qualifications and the benefits outweigh the cons, then a reverse mortgage might be the right step.

References

  1. “Reverse Mortgage Rules & Requirements” AAG. Accessed January 31, 2017 from https://www.aag.com/news/reverse-mortgage-rules.
  2. “Reverse Mortgage” Investopedia. Accessed January 31, 2017 from http://www.investopedia.com/terms/r/reversemortgage.asp.
  3. “Reverse Mortgages” Federal Trade Commission. Accessed January 31, 2017 from https://www.consumer.ftc.gov/articles/0192-reverse-mortgages.
  4. “Reverse Mortgage Pros and Cons” The Balance. Accessed February 2, 2017 from https://www.thebalance.com/reverse-mortgage-pros-and-cons-2388750.
  5. “What is a Reverse Mortgage?” The Balance. Accessed February 2, 2017 from https://www.thebalance.com/what-is-a-reverse-mortgage-315699.
  6. “Top Ten Things to Know if You’re Interested in a Reverse Mortgage” U.S. Department of Housing and Urban Development. Accessed January 31, 2017 from https://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/rmtopten.