reverse mortgages

What Is a Reverse Mortgage?

Improve your life by cashing in on your home’s equity

Whether seeking money to finance a home improvement, pay off a current mortgage, supplement their retirement income, or pay for healthcare expenses, many older Americans are turning to “reverse” mortgages. They allow older homeowners to convert part of the equity in their homes into cash without having to sell their homes or take on additional monthly bills.

In a “regular” mortgage, you make monthly payments to the lender. But in a “reverse” mortgage, you receive money from the lender and generally don’t have to pay it back for as long as you live in your home. Instead, the loan must be repaid when you die, sell your home, or no longer live there as your principal residence. Reverse mortgages can help homeowners who are house-rich but cash-poor stay in their homes and still meet their financial obligations.

To qualify for most reverse mortgages, you must be at least 62 and live in your home. The proceeds of a reverse mortgage (without other features, like an annuity) are generally tax-free, and many reverse mortgages have no income restrictions.

Three Types of Reverse Mortgages

The three basic types of reverse mortgage are: single-purpose reverse mortgages, which are offered by some state and local government agencies and nonprofit organizations; federally-insured reverse mortgages, which are known as Home Equity Conversion Mortgages (HECMs), and are backed by the U. S. Department of Housing and Urban Development (HUD); and proprietary reverse mortgages, which are private loans that are backed by the companies that develop them.

Single-purpose reverse mortgages generally have very low costs. But they are not available everywhere, and they only can be used for one purpose specified by the government or nonprofit lender, for example, to pay for home repairs, improvements, or property taxes. In most cases, you can qualify for these loans only if your income is low or moderate.

Loan Features

Reverse mortgage loan advances are not taxable, and generally do not affect Social Security or Medicare benefits. You retain the title to your home and do not have to make monthly repayments. The loan must be repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence. In the HECM program, a borrower can live in a nursing home or other medical facility for up to 12 months before the loan becomes due and payable.

 

How Does it Work?

  • You must live in home as your principal residence.
  • No repayment of the mortgage is required until you permanently move out, sell the home, or pass away.
  • You are required to continue paying property taxes and insurance and maintain the home according to FHA guidelines. 

 

Advantages

  • No monthly mortgage payments* 
  • Non-recourse loan –you’ll never owe more than what home is worth
  • Leverage crucial retirement cash liquidity
  • No limitations on how you use funds
  • No pre-pay penalty 

* You must live in the home as your main residence. 

 

Eligibility

  • Be 62 years of age or older
  • Own the property outright or have considerable equity
  • Occupy the property as your principal residence
  • Not be delinquent on any federal debt
  • Participate in a consumer information session from HUD 

 

Consumer Protections 

  • Non Borrowing Spouse (< 62) is now protected – All FHA HECM’s are insured through the Federal Housing Administration (FHA) – Borrowers have no limit as to how long they can stay in the home* – When loan becomes due, Estate can buy your home at 95% of current value, regardless of what is owed
  • Education – Financial counseling is required (provided by HUD)
  • Safeguards
  • ensures theamount owed on the loan can neverbemore than the value of thehome at the timeof sale
  • Reverse Mortgages are Non-Recourse Loans

*Taxes and insurance must still be paid on time. Any costs to keep up property maintenance must still be paid. Failing to meet these requirements can lead to default. 
 

Non-Recourse Loan

  • The HECM is insured through FHA and is a non-recourse loan.
  • The homeowner or their heirs will neverbe asked to pay back more than the value of the home, even if the debt has grown to be greater than the value.* 

*If the heirs choose to keep the home, they will need to pay off the loan at 95% of the fair market value of the home, as determined by a third-party appraiser. 

 

Things to Consider

  • Prepare for counseling meeting
  • Continue keeping property taxes and homeowners insurance current
  • Home value, owner age(s), and current interest rate determine eligible amount to borrow

 

Will I still have an estate that I can leave to my heirs?

  • When the loan is due, the estate will repay the cash they received from the reverse mortgage, plus interest and any other fees, to the lender. The remaining equity in the home, if any, belongs to the borrower or to their heirs.
  • The more you borrow and the longer you stay in the loan, the less equity your estate can typically expect to receive.
  • Factors that determine future equity include; future interest rate (+/-), home appreciation (+/-), consumer spending, longevity in the loan.

 

When does the loan become due and payable?

  • A HECM loan must be repaid in full when the last remaining borrower permanently vacates the residence. The loan also becomes due and payable if:
  • Borrowers did not pay property taxes or hazard insurance or violate other obligations. 
  • Borrowers permanently move to a new principal residence. 
  • The last borrower fails to live in the home for 12 months in a row(for example, the borrower has a 12-month or longer stay in a nursing home).
  • The borrowers allow the property to deteriorate and do not make necessary repairs.

 

Can the homeowner be forced out of their home?

The FHA reverse mortgage loan exists to help homeowners stay in their home. However, the homeowner must reside in the home as their primary residence, pay property taxes and homeowners insurance, and maintain the home. Failure to do so may require the servicer to initiate foreclosure proceedings, per HUD guidelines.

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