What Is a Reverse Mortgage?
Reverse mortgage is a loan. A homeowner who is 62 or older and has considerable home equity can borrow against the value of their home and receive funds as a lump sum, fixed monthly payment or line of credit. Unlike a forward mortgage … the type used to buy, a home 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 the loan amount doesn’t exceed the home’s value and 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 this could happen is through a drop in the home’s market value; another is if the borrower lives a long time.
If you’re 62 or older and want money to pay off your mortgage, supplement your income, or pay for healthcare expenses – you may consider a reverse mortgage. It allows you to convert part of the equity in your home into cash without having to sell your home or pay additional monthly bills. But take your time: a reverse mortgage can be complicated and might not be right for you.
A reverse mortgage can use up the equity in your home, which means fewer assets for you and your heirs. If you do decide to look for one, review the different types of reverse mortgages, and comparison shop before you decide on a particular company.
How do Reverse Mortgages Work?
When you have a regular mortgage, you pay the lender every month to buy your home over time. In a reverse mortgage, you get a loan in which the lender pays you. Reverse mortgages take part of the equity in your home and convert it into payments to you – a kind of advance payment on your home equity. The money you get usually is tax-free.
Generally, you don’t have to pay back the money for as long as you live in your home. When you die, sell your home, or move out, you, your spouse, or your estate would repay the loan. Sometimes that means selling the home to get money to repay the loan.
There are three kinds of reverse mortgages: single purpose reverse mortgages – offered by some state and local government agencies, as well as non-profits; proprietary reverse mortgages – private loans; and federally-insured reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs).
If you get a reverse mortgage of any kind, you get a loan in which you borrow against the equity in your home. You keep the title to your home. Instead of paying monthly mortgage payments, though, you get an advance on part of your home equity. The money you get usually is not taxable, and it generally won’t affect your Social Security or Medicare benefits.
When the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence, the loan has to be repaid. In certain situations, a non-borrowing spouse may be able to remain in the home. Here are some things to consider about reverse mortgages:
There are fees and other costs. Reverse mortgage lenders generally charge an origination fee and other closing costs, as well as servicing fees over the life of the mortgage. Some also charge mortgage insurance premiums (for federally-insured HECMs).
You owe more over time. As you get money through your reverse mortgage, interest is added onto the balance you owe each month. That means the amount you owe grows as the interest on your loan adds up over time.
Interest rates may change over time. Most reverse mortgages have variable rates, which are tied to a financial index and change with the market. Variable rate loans tend to give you more options on how you get your money through the reverse mortgage. Some reverse mortgages – mostly HECMs – offer fixed rates, but they tend to require you to take your loan as a lump sum at closing. Often, the total amount you can borrow is less than you could get with a variable rate loan.
Interest is not tax deductible each year. Interest on reverse mortgages is not deductible on income tax returns – until the loan is paid off, either partially or in full.
You have to pay other costs related to your home. In a reverse mortgage, you keep the title to your home. That means you are responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. And, if you don’t pay your property taxes, keep homeowner’s insurance, or maintain your home, the lender might require you to repay your loan.
A financial assessment is required when you apply for the mortgage. As a result, your lender may require a “set-aside” amount to pay your taxes and insurance during the loan. The “set-aside” reduces the amount of funds you can get in payments. You are still responsible for maintaining your home.
What happens to your spouse?
With HECM loans, if you signed the loan paperwork and your spouse didn’t, in certain situations, your spouse may continue to live in the home even after you die if he or she pays taxes and insurance, and continues to maintain the property. But your spouse will stop getting money from the HECM, since he or she wasn’t part of the loan agreement.
What can you leave to your heirs?
Reverse mortgages can use up the equity in your home, which means fewer assets for you and your heirs. Most reverse mortgages have something called a “non-recourse” clause. This means that you, or your estate, can’t owe more than the value of your home when the loan becomes due and the home is sold. With a HECM, generally, if you or your heirs want to pay off the loan and keep the home rather than sell it, you would not have to pay more than the appraised value of the home.
Types of Reverse Mortgages
As you consider whether a reverse mortgage is right for you, also consider which of the three types of reverse mortgage might best suit your needs.
- 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. HECMs and proprietary reverse mortgages may be more expensive than traditional home loans, and the upfront costs can be high. That’s important to consider, especially if you plan to stay in your home for just a short time or borrow a small amount.
How much you can borrow with a HECM or proprietary reverse mortgage depends on several factors:
- Your age
- The type of reverse mortgage you select
- The appraised value of your home
- Current interest rates
- A financial assessment of your willingness and ability to pay property taxes and homeowner’s insurance.
In general, the older you are, the more equity you have in your home, and the less you owe on it, the more money you can get.
Before apply for a Reverse Mortgage we recommend talk first with one of our Reverse Mortgage Expert to explain you the loan’s costs and financial implications. Our Expert also must explain the possible alternatives to a HECM – like government and non-profit programs, or a single-purpose or proprietary reverse mortgage. He or she also should be able to help you compare the costs of different types of reverse mortgages and tell you how different payment options, fees, and other costs affect the total cost of the loan over time.
With a HECM, there generally is no specific income requirement. However, lenders must conduct a financial assessment when deciding whether to approve and close your loan. They’re evaluating your willingness and ability to meet your obligations and the mortgage requirements.
Based on the results, one of our lenders could require funds to be set aside from the loan proceeds to pay things like property taxes, homeowner’s insurance, and flood insurance (if applicable). If this is not required, you still could agree that your lender will pay these items. If you have a “set-aside” or you agree to have the lender make these payments, those amounts will be deducted from the amount you get in loan proceeds. You are still responsible for maintaining the property.
The HECM lets you choose among several payment options:
- a single disbursement option – this is only available with a fixed rate loan, and typically offers less money than other HECM options.
- a “term” option – fixed monthly cash advances for a specific time.
- a “tenure” option – fixed monthly cash advances for as long as you live in your home.
- a line of credit – this lets you draw down the loan proceeds at any time, in amounts you choose, until you have used up the line of credit. This option limits the amount of interest imposed on your loan, because you owe interest on the credit that you are using.
- a combination of monthly payments and a line of credit. You may be able to change your payment option for a small fee.
HECMs generally give you bigger loan advances at a lower total cost than proprietary loans do. In the HECM program, a borrower generally can live in a nursing home or other medical facility for up to 12 consecutive months before the loan must be repaid. Taxes and insurance still must be paid on the loan, and your home must be maintained.
With HECMs, there is a limit on how much you can take out the first year. Your lender will calculate how much you can borrow, based on your age, the interest rate, the value of your home, and your financial assessment. This amount is called your “initial principal limit.”
Generally, you can take out up to 60% of your initial principal limit in the first year. There are exceptions, though.
Do you want a reverse mortgage to pay for home repairs or property taxes?
If so, call us to find out if you qualify for any low-cost single purpose loans in your area.
Do you live in a higher-valued home?
You might be able to borrow more money with a proprietary reverse mortgage. But the more you borrow, the higher the fees you’ll pay. You also might consider a HECM loan.Our Reverse Mortgage Consultant can help you compare these types of loans side by side, to see what you’ll get – and what it costs.
Some reverse mortgage salespeople might suggest ways to invest the money from your reverse mortgage – even pressuring you to buy other financial products, like an annuity or long-term care insurance. Resist that pressure. If you buy those kinds of financial products, you could lose the money you get from your reverse mortgage.
You don’t have to buy any financial products, services or investment to get a reverse mortgage. In fact, in some situations, it’s illegal to require you to buy other products to get a reverse mortgage.
When you take out a reverse mortgage, you can choose to receive the proceeds in one of six ways:
- 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 actually 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.
Pros and Cons
Once you’re 62 or older, a reverse mortgage can be a good way to get cash when your home equity is your biggest asset and you don’t have another way to get enough money to meet your basic living expenses. A reverse mortgage allows you to keep living in your home as long as you keep up with property taxes, maintenance, and insurance and don’t need to move into a nursing home or assisted living facility for more than a year.
However, taking out a reverse mortgage means spending a significant amount of the equity you’ve accumulated on interest and loan fees, which we will discuss below. It also means you likely won’t be able to pass your home down to your heirs. If a reverse mortgage doesn’t provide a long-term solution to your financial problems, only a short-term one, it may not be worth the sacrifice.
What if someone else, such as a friend, relative or roommate, lives with you? If you get a reverse mortgage, that person won’t have any right to keep living in the home after you pass away.
Another problem some borrowers run into with reverse mortgages is outliving the mortgage proceeds. If you pick a payment plan that doesn’t provide a lifetime income, such as a lump sum or term plan, or if you take out a line of credit and use it all up, you might not have any money left when you need it.
Your responsibilities under the reverse mortgage rules are to stay current on property taxes and homeowners insurance and keep the home in good repair. And if you stop living in the house for longer than one year — even if it’s because you’re living in a long-term care facility for medical reasons — you’ll have to repay the loan, which is usually accomplished by selling the house .
The Bottom Line
A reverse mortgage can be a helpful financial tool for senior homeowners who understand how the loans work and the trade-offs involved. Ideally, anyone interested in taking out a reverse mortgage will take the time to thoroughly learn about how these loans work. That way, no unscrupulous lender or predatory scammer can prey on them, they’ll be able to make a sound decision even if they get a poor-quality reverse mortgage counselor and the loan won’t come with any unpleasant surprises.
Even when a reverse mortgage is issued by the most reputable of lenders, it’s still a complicated product. Borrowers must take the time to educate themselves about it to be sure they’re making the best choice about how to use their home equity.
If you have any question about Reverse Mortgage contact us now by phone 305-742-8179/786-420-9464 or by email Contact@MaraidLending.com … and one of our expert will contact you in less of 48 hours.