What is a Reverse Mortgage?A reverse mortgage is a home-secured loan that’s exclusively for homeowners and homebuyers age 62 and older. It allows borrowers to convert some of the equity in their home into income-tax-free funds. (Not tax advice, consult a tax professional).
There are different loan products to choose from that offer you options on what interest rate you are charged, how much money you can access, and how you receive your payments. Unlike a regular “forward” mortgage or traditional home equity loan or home equity line of credit, there are no monthly principal and interest payments as long as at least one of the borrowers lives in the home as their primary residence.
As with any mortgage, in order for the loan to remain in good standing the borrower must also keep up with property-related taxes, insurance and upkeep.
What is a Home Equity Conversion Mortgage (HECM)?A HECM is a reverse mortgage loan that's insured by the Federal Housing Administration (FHA).
What are the basic requirements for a Reverse Mortgage?To be eligible for a reverse mortgage, you’ll need to meet the requirements set by the federal government:
- All borrowers must be age 62 or older (this applies to all co-owners listed on the home’s title).
- The home must be your principal residence. And it must meet standards set by the United States Department of Housing and Urban Development (HUD) on property type and condition. You may be able to use your reverse mortgage to pay for any required repairs in order to meet these standards.
- Eligible property types include single-family homes, 2- to 4-unit properties, manufactured homes meeting certain criteria, condominiums that are approved by the Federal Housing Administration (FHA), and townhouses. Co-ops do not qualify.
What if I still owe money on a first or second mortgage?You may still be eligible. Proceeds from your reverse mortgage would first be used to pay off any existing mortgage(s). This means the balance of your existing mortgage(s) will be added to the balance of your reverse mortgage. A licensed RMF loan officer can help you find out if you are eligible.
How much money can I get?The specific amount depends on several factors, including:
- Your age
- The type of reverse mortgage you select
- Current interest rates
- Appraised value of your home
- Federal Housing Administration (FHA) lending limits
How can I receive the funds from a reverse mortgage?You have a number of choices for how you receive your funds:
- Lump sum
- Monthly advances (either for a fixed length of time, or as long as you live in the home)
- Line of credit (take funds when you need them) — this has become the most popular option
- Or a combination of the above
How is a Reverse Mortgage different from a traditional home equity loan or home equity line of credit?A reverse mortgage offers certain advantages:
- With a traditional home equity loan or home equity line of credit, you must make monthly principal and interest payments on the balance while you live in the home - with a reverse mortgage, you don't. Your reverse mortgage balance, including accrued interest and fees, does not have to be repaid until you sell the home or permanently leave the home, as long as you meet your loan obligations (which includes keeping current with property-related taxes, insurance and upkeep).
- With a reverse mortgage line of credit, the unused amount in your credit line actually grows over time - giving you access to more available funds. This means that the less you take out up front, the more will be available to you later.
- And the lender cannot “freeze” or reduce the line of credit, as long as you fulfill your loan obligations - so it will be there if and when you need it.
Will I be taxed on my reverse mortgage proceeds?Typically, reverse mortgage loan funds are not subject to income tax. Contact your tax advisor for additional details.
Will a reverse mortgage affect my government benefits?The funds from a reverse mortgage generally do not affect regular Social Security or Medicare benefits. However, needs-based benefits, such as Medicaid and Supplemental Security Income (SSI), may be impacted. One of our licensed reverse mortgage specialists can provide additional general information, but you should contact a financial professional or government benefits specialist about your particular situation.
How can I use the proceeds?Use the proceeds for the things you need and want. For example: establishing a “rainy day” fund for the unexpected, paying monthly bills, making home improvements, paying for health care, covering the cost of in-home services, making a major purchase such as a new vehicle, and more.
Can I use a reverse mortgage to purchase a home?Yes, with the HECM (Home Equity Conversion Mortgage) For Purchase loan, qualified borrowers can use their loan proceeds to buy a home that better suits their needs and lifestyle. It’s a home financing option that can make it easier for buyers age 62 and older to afford the home they want, while preserving more of their savings.
Are interest rates fixed or variable?Reverse mortgages are available with either fixed or variable rates. Borrowers who elect a fixed-rate loan will receive their funds as a single disbursement lump sum. A lump sum disbursement is also available with an adjustable rate. A line of credit and monthly advances have an adjustable rate.
Can a reverse mortgage be refinanced?Yes, refinancing is possible. This option may be to your advantage if your home increases in value, making more funds available.
Will I have to pay any fees?With the exception of a fee for government-required reverse mortgage counseling, most of the fees associated with a reverse mortgage can be financed with your loan, so there’s no immediate out-of-pocket cost. The costs are added to the loan amount (“principal”) and paid along with the accrued interest when the loan becomes due. Depending on the loan option you choose, these fees may include an origination fee, closing costs, a mortgage insurance premium (required for HECM loans) and a monthly servicing fee. Ask us about our “Low-Cost HECM” pricing option, which eliminates nearly all origination and closing costs.
What has to be repaid when the loan becomes due?You’ll repay the loan balance, any fees that have been added, and the accrued interest. Homeowners (or their heirs) usually choose to do this through the sale of the home or other assets. Repaying the loan by refinancing through a conventional mortgage is also an option.
When will the principal and interest charges become due?The loan must be paid in full when one of the following occurs:
- A “maturity event” - the loan becomes due and payable when the home is sold, or the borrower or non-borrowing spouse meeting certain criteria no longer occupies the home as their principal residence (i.e., passes away, moves out, or vacates the property for more than 12 months).
- You fail to pay property taxes or homeowners insurance.
- You let the property deteriorate beyond what is considered reasonable wear and tear, and do not correct the problem.