You’ve seen commercials with beloved Hollywood actors talking about reverse mortgages – but what exactly is a reverse mortgage? At a high-level, reverse mortgages are loans available to homeowners age 62 and older that allow them to borrow money based on the value of their homes.
It is different than other loans since borrowers do not have to pay the debt back right away. The government agency that provides general oversight is the Federal Housing Authority (FHA).
To help you better understand reverse mortgages, we’ve answered some of the most frequently asked questions (FAQs) below.
Reserve Mortgage FAQs
Who is in the best position to get a reverse mortgage?
Those in the best position to get a reverse mortgage are those that do not plan to move, can afford the cost of maintaining their home, and want to access the equity in their home to supplement their income or have money available for a rainy day.
How does it work?
With a reverse mortgage, the bank makes payments to the borrower based on a percentage of accumulated home equity.
This occurs after a financial assessment is done on your background and a selection is made on the type of mortgage.
As you consider whether a reverse mortgage is right for you, consider which of the three types of reverse mortgage might best suit your needs as described by the Federal Trade Commission (FTC):
Single-purpose reverse mortgages are the least expensive option. They’re offered by some state and local government agencies, as well as non-profit organizations, but they’re not available everywhere. These loans may be used for only one purpose, which the lender specifies. For example, the lender might say the loan may be used only to pay for home repairs, improvements, or property taxes. Most homeowners with low or moderate income can qualify for these loans.
Proprietary reverse mortgages are private loans that are backed by the companies that develop them. If you own a higher-valued home, you may get a bigger loan advance from a proprietary reverse mortgage. So, if your home has a higher appraised value and you have a small mortgage, you might qualify for more funds.
Home Equity Conversion Mortgages (HECMs) are federally-insured reverse mortgages and are backed by the U. S. Department of Housing and Urban Development (HUD). HECM loans can be used for any purpose.
When does it need to be repaid?
The reverse mortgage needs to be paid when the borrower dies, sells the home, or permanently moves out.
There are two primary costs for government-backed reverse mortgages:
- Interest Rates: These may be fixed if you take a lump sum (with rates starting under 3.5%—a rate comparable to conventional mortgages and much lower than other home equity loan products). Otherwise, they’ll be variable based on the London Interbank Offered Rate (LIBOR), with a margin added for the lender.
- Mortgage Insurance Premiums: Federally backed reverse mortgages have a 2% upfront mortgage insurance premium and annual premiums of 0.5%.
Who is eligible?
Seniors age 62 and older who own homes outright or have small mortgages are eligible for a reverse mortgage.
In addition, you must also qualify based on the following standards:
- You and/or an eligible (borrowing) spouse — who must be named as such on the loan even if he or she is not a co-borrower — live in the home as your primary residence
- You have no delinquent federal debts
- You own your home outright or have a considerable amount of equity in it
- You attend the mandatory counseling session with a home equity conversion mortgages (HECM) counselor approved by the Department of Housing and Urban Development
- Your home meets all FHA property standards and flood requirements
- You continue paying all property taxes, homeowners’ insurance and other household maintenance fees as long as you live in the home
How can the money be used?
Money received from a reverse mortgage can be used for any reason. Retirees typically use cash to supplement income, pay for health care expenses, pay off debt, or finance home improvement jobs. Remember that when you obtain the mortgage you may have to pay for closing costs and servicing fees from any 3rd part representation.
Where does the reverse mortgage come from?
While the government doesn't provide the reverse mortgage loans, the Federal Housing Authority (FHA) oversees the Home Equity Conversion Mortgage (HECM) program. The FHA insures reverse mortgages so that lenders can recoup their entire investment, even if the home's sale value is less than the balance of the loan.
How can you receive the reverse mortgage loan?
Reverse mortgages can be received in any combination of the following options:
- Line of credit – draw as needed up to the maximum eligible amount
- Lump-sum – a lump sum of cash at closing (only available on fixed-rate loans)
- Tenure – monthly payments for the life of the loan
- Term – monthly payments for a specific number of years
Next Steps
When considering whether to apply for a reverse mortgage, you should consider, among other things, whether:
- you want to remain in your home
- you are healthy enough to continue living in your home
- other alternatives, such as selling your home and purchasing a smaller, less expensive home, would be better for you
- your children, or other heirs, want to inherit the home
- the loan proceeds will be enough, with any other source of income you have, will be enough to enable you to live in your home
Review the myths vs. facts that Aging Care wonderfully summarizes below to guide you on your next steps:
Myth: The bank will own the senior’s home.
Fact: Banks are not in the business of owning seniors’ homes. The homeowner’s name remains on the title and they retain ownership.
Myth: The bank can make an elderly person leave their home.
Fact: HECMs are regulated by the federal government and banks are not allowed to make seniors leave their homes. In fact, the lender is more interested in having the senior stay in their home for as long as possible. Seniors are merely responsible for continuing to pay their homeowners insurance premiums and property taxes and for keeping the home in good shape.
Myth: The heirs will be responsible for repaying the loan when the senior dies.
Fact: Heirs are never responsible for repaying these “non-recourse” loans. After the senior passes away, their estate has 30 days (extensions for up to one year are possible) to sell the home for fair market value. That sale price then repays the loan. If heirs are interested in keeping the home, then the loan must be paid using another source of funds. According to the Consumer Financial Protection Bureau (CFPB), “heirs will never have to pay more than the full loan balance or 95 percent of the home’s appraised value, whichever is less.”
Myth: Seniors must make payments on reverse mortgage loans.
Fact: No payment is ever due on a reverse mortgage until the last living homeowner permanently leaves the home. However, the loan may become due earlier than anticipated if the homeowner falls into default due to unpaid homeowner’s insurance premiums, unpaid property taxes or the home falling into disrepair.
Speak with a financial advisor today to determine if a reverse mortgage is the best option for you.
