What is a Reverse Mortgage?
A mortgage to buy or refinance a property that you occupy.
The Two Primary Requirements of a Reverse Mortgage:
1. You are 62 or better older
2. You have a sizable down payment for a purchase or considerable equity if you are refinancing.
How Does a Reverse Mortgage Work if you are Currently Living in the House?
You can borrow against the value of your home, and based on your age and equity, you can receive funds as a:
- Lump sum
- Fixed monthly payment, or
- Line of credit
Unlike a forward mortgage, a reverse mortgage doesn’t require the homeowner to make any loan payments.
Instead, the entire loan balance becomes due and payable when the borrower dies, moves away permanently, or sells the home.
Federal regulations require lenders to structure the transaction so that the loan amount doesn’t exceed the home’s value and that the borrower or borrower’s estate won’t be held responsible for paying the difference if the loan balance does become larger than the home’s value. One way that this could happen is through a drop in the home’s market value, another is if the borrower lives for a long time.
Reverse Mortgage Common MYTHS and FACTS
Myth 1: Reverse mortgage means I’ll have no monthly mortgage payment.
FACT: Many seniors who don’t qualify for traditional financing are eligible for a reverse mortgage.
Myth 2: If I take out a reverse mortgage the lender will own my home.
FACT: Homeowners still retain title and ownership to their homes during the life of the loan, and can choose to sell the home at any time. As long as the borrower continues to live in and maintain the home and property taxes and homeowners insurance are paid, the loan cannot be called due.
Myth 3: There are restrictions on how reverse mortgage proceeds may be used.
FACT: There are no restrictions. The cash proceeds from the reverse mortgage can be used for virtually any purpose and borrowers should be cautious of lenders attempting to cross sell other products. Many seniors have used reverse mortgages to pay off debt, help their kids, make ends meet or to have a financial reserve.
Myth 4: Only low-income seniors get reverse mortgages.
FACT: Although some seniors may have a greater need than others for the monthly proceeds or lump sum funds reverse mortgages offer, most simply prefer to be free of monthly mortgage payments. Without monthly mortgage payments, many homeowners find they can maintain their existing quality of life and build their savings to help with future expenses. A growing number of people who have no immediate need are taking out these loans so that they have a financial cushion for future expenses.
Myth 5: If I outlive my life expectancy, the lender will evict me.
FACT: Reverse mortgage lenders put no time limit on how long the borrower(s) can stay in their homes. Since homeowners still own the property, lenders cannot evict them as long as the borrower continues to live in and maintain the home, and property taxes and homeowners insurance are paid.
Myth 6: A reverse mortgage will affect my government benefits.
FACT: A reverse mortgage generally does not affect regular Social Security or Medicare benefits. However, if you are on Medicaid, any reverse mortgage proceeds that you receive would count as an asset and could impact Medicaid eligibility. To be sure, we recommend that potential borrowers consult their federal benefits administrators or financial advisors.
Myth 7: There are no objective advisors available to seniors trying to decide if a reverse mortgage suits their needs.
FACT: Borrowers are required to work with independent, third party counselors approved by the U.S. Department of Housing and Urban Development (HUD) in their local communities. This educational session helps them make the right decision for their unique situations.
Myth 8: My children will be responsible for the repayment of the loan.
FACT: If the borrower or their estate wants to retain the property, the balance must be paid in full. However, as long as the borrower or their estate sells the property to pay off the debt, there is no recourse if the HECM loan balance exceeds the home’s value at maturity. Any equity remaining in the property after the reverse mortgage is retired belongs to the borrower or their estate.
Myth 9: Reverse mortgage lenders take advantage of seniors.
FACT: Seniors who have been victims of reverse mortgage lending schemes are extreme exceptions and typically victims of unsavory lenders. As a consumer, you should only work with reputable lenders. Protect yourself by conducting as much research as possible by consulting government agencies, your financial advisors and NRMLA, the National Reverse Mortgage Lender’s Association.
Myth 10: I cannot get a reverse mortgage if I have an existing mortgage.
FACT: If your house isn’t paid off, the proceeds you receive from the reverse mortgage must first be used to pay off any existing mortgage.
How the Program Works
There are many factors to consider before deciding whether a Reverse Mortgage is right for you. To aid in this process, you must meet with a HUD Approved Reverse Mortgage counselor to discuss program eligibility requirements, financial implications, and alternatives to obtaining a Reverse Mortgage and repaying the loan. Counselors will also discuss provisions for the mortgage becoming due and payable. Upon the completion of the Reverse Mortgage counseling, you should be able to make an independent, informed decision about whether this product will meet your specific needs. To find a Reverse Mortgage counselor please call (800) 983-2430 toll-free.
There are borrower and property eligibility requirements that must be met. If you meet the eligibility criteria we will have you complete a reverse mortgage application and arrange for you to get a counselor. We will discuss other requirements of the Reverse Mortgage program, the loan approval process, and repayment terms.
- Be 62 years of age or older
- Own the property outright or paid down a considerable amount
- Occupy the property as your principal residence
- Not be delinquent on any federal debt
- Participate in a consumer information session given by a HUD-approved HECM counselor
The following eligible property types must meet all FHA property standards and flood requirements:
- Single-family home or 2-4 unit home with one unit occupied by the borrower
- HUD-approved condominium project
- Manufactured home that meets FHA requirements
Income, assets, monthly living expenses, and credit history may be verified. Timely payment of real estate taxes, hazard, and flood insurance premiums may be verified.
Five Payment Plans to Choose From
- Lump-sum: Get all the proceeds at once when your loan closes. This is the only option that comes with a fixed interest rate. The other five have adjustable interest rates.
- Equal monthly payments (annuity): For as long as at least one borrower lives in the home as a principal residence, the lender will make steady payments to the borrower. This is also known as a tenure plan.
- Term payments: The lender gives the borrower equal monthly payments for a set period of the borrower’s choosing, such as 10 years.
- Line of credit: Money is available for the homeowner to borrow as needed. The homeowner only pays interest on the amounts borrowed from the credit line.
- Equal monthly payments plus a line of credit: The lender provides steady monthly payments for as long as at least one borrower occupies the home as a principal residence. If the borrower needs more money at any point, they can access the line of credit.
- Term payments plus a line of credit: The lender gives the borrower equal monthly payments for a set period of the borrower’s choosing, such as 10 years. If the borrower needs more money during or after that term, they can access the line of credit.
The Amount you May Borrow Will Depend On:
- The age of the youngest borrower
- Current interest rate
- Lesser of appraised value or the HECM FHA mortgage limit of $625,500 or the sales price
- Initial Mortgage Insurance Premium–your choices are HECM Standard or HECM SAVER
You can pay for most of the costs of a HECM by financing them and having them paid from the proceeds of the loan. Financing the costs means that you do not have to pay for them out of your pocket. On the other hand, financing the costs reduces the net loan amount available to you.
The HECM loan includes several fees which include: 1) mortgage insurance premiums (initial and annual) 2) third party charges 3) origination fee 4) interest and 5) servicing fees. We can discuss which fees are mandatory.
Call us today to find out if a reverse mortgage is right for you!
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