Reverse Mortgage 101
What is a Reverse Mortgage?
A reverse mortgage is a special type of home loan that lets a homeowner converts a portion of the equity in his or her home into cash. A reverse mortgage enables older homeowners (62+) to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you. As reverse mortgage is not required to be paid back, homeowners have peace of mind and they can continue to live in their homes without worrying about payment and foreclosure issues. In recent times, reverse mortgages are becoming popular in U.S because of the flexibility and financial help it offers. In addition, some of the reverse mortgages (such as HUD’s) are federally-insured loans and offer older American even greater financial security. The proceeds from a reverse mortgage can be used for anything, whether its to supplement retirement income to cover daily living expenses, repair or modify your home (i.e., widening halls or installing a ramp), pay for health care, pay off existing debts, buy a new car or take a "dream" vacation, cover property taxes, and prevent foreclosure. If you’re a senior citizen and are looking for help with your financial life, a reverse mortgage can be a great option. While reverse mortgage is an option, you should also keep in mind that your home is probably your largest single investment, so it's critical to spend some time evaluating all possible options and learning more about reverse mortgages before you decide if one is right for you.
All reverse mortgages, whether the government-insured Home Equity Conversion Mortgage (HECM) or any conventional product share a set of common characteristic. One of the main requirements is the age limitation. If you’re interested in applying for a reverse mortgage, you must be at least 62 years old and own a home. However, there are some conventional reverse mortgages that have differing age requirements. When you apply for a reverse mortgage, you’re cashing out only the part of the equity in your home so you always retain title or ownership of your home. The lender never, at any point, owns the home, even after you (or last surviving spouse) permanently vacate the property. You must still pay property taxes and home insurance premiums, and keep the home well maintained. For some reasons, if you are unable to pay your property taxes and insurance premiums, then a special set-aside from your reverse mortgage can be created. This could be a big help for those older American who don’t have resources to pay property taxes and insurance premium. Further, you don’t pay a reverse mortgage loan back until you or your surviving spouse vacate the property. At this time, either you or your heirs (estate) should pay back of the loan using either private funds or by selling the home. In case you decide to sell the home for paying reverse mortgage, all leftover proceeds from the sale of the home go to you or the estate. 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.
The amount of funds you are eligible to receive depends on your age (or age of the youngest borrower in the case of couples), the value of the home, the interest rate and the up front costs. When you apply for a reverse mortgage loan, you must pay fees as you would in case of a regular mortgage loan. These fees can be financed, or paid out of the available loan proceeds. This means you incur very little out-of-pocket expense to get a reverse mortgage. In most cases, you only have to pay for the appraisal, which costs roughly $500 depending on your market. You also have the options to decide the mode of payment. You can choose to receive the money from a reverse mortgage all at once as a lump sum, fixed monthly payments either for a set term or for as long as you live in the home, as a line of credit, or a combination of these. The most popular option – chosen by more than 60 percent of borrowers – is the line of credit, which allows you to draw on the loan proceeds at any time. Your outstanding loan balance (amount owed) grows each time you access funds from your line of credit or receive a monthly payment. In addition, the lender is charging you interest on the outstanding loan balance as well as a monthly servicing fee. Reverse mortgages may have fixed or variable rates. Most have variable rates that are tied to a financial index and will likely change according to market conditions. Further, Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole. Reverse mortgages can use up all or some of the equity in your home, leaving fewer assets for you and your heirs. All reverse mortgages have a "non-recourse" feature, which means that the total amount owed can never exceed the appraised value of the home. If the amount owed exceeds the home's appraised value, then the lender or the federal government (In case loan is federally insured) will absorb that loss.
Reverse mortgage loan advances are not taxable, and generally do not affect Social Security or Medicare benefits. However, if you are on Medicaid, any reverse mortgage proceeds that you receive must be used immediately. Funds that you retain would count as an asset and could impact Medicaid eligibility. For example, if you receive $10,000 in a lump sum for home repairs and spend it all the same calendar month, everything is fine. Any residual funds remaining in your bank account the following month would count as an asset. If the total liquid resources (including other bank funds and savings bonds) exceed $2,000 for an individual or $3,000 for a couple, you would be ineligible for Medicaid.
Getting a Good Deal
If you are considering a reverse mortgage, shop around to compare your options and the offered terms. Learn as much as you can about reverse mortgages before you talk to a counselor or lender. It will help you ask more informed questions, which could lead to a better deal.
If you want to make a home repair or improvement or need help paying your property taxes, you may want to find out if you qualify for any low-cost single-purpose loans that may be available in your area. Area Agencies on Aging (AAAs) generally know about these programs. If you are interested in a federally-insured HECM, know that all HECM lenders must follow HUD rules, and that many of the loan costs including the interest rate will be the same no matter which lender you select. Still, some costs including the origination fee, other closing costs, and servicing fees may vary among lenders. If you live in a higher-valued home, you may be able to borrow more from a proprietary reverse mortgage. But it generally will cost more. The best way to see key differences between a HECM and a proprietary loan is with a detailed side-by-side comparison of future costs and benefits. Many HECM counselors and lenders can provide you with this important information.
No matter which type of reverse mortgage you are considering, be certain you understand all the conditions that could make the loan due and payable. Ask a counselor or lender to explain the Total Annual Loan Cost (TALC) rates, which show the projected annual average cost of a reverse mortgage, including all itemized costs. No matter why you decide to take a reverse mortgage, you generally have at least three business days after signing the loan documents to cancel it for any reason without penalty. Remember that you must cancel in writing. The lender must return any money you have paid so far for the financing. Whether a reverse mortgage is right for you is a big question. Consider all your options. You may qualify for less costly alternatives. Contact the following organizations for more information.
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