What is a Reverse Mortgage Loan?
A reverse mortgage solves this problem. It allows senior homeowners who are 62 and older to borrow against the equity they’ve built up in their homes.
For many, a reverse mortgage can help you secure a comfortable retirement or be a way to cover retirement expenses or else a way to supplement your income.
How Does a Reverse Mortgage Work?
- A reverse mortgage works by allowing homeowners age 62 and older to borrow from their home’s equity without having to make monthly mortgage payments.
- It’s a loan option that can help make it easier for maturing adult homeowners to live a more cushioned retirement.
- The loan is repaid when the borrower passes away, leaves the home permanently or sells.
- To receive your funds from the reverse mortgage, you must keep current with property taxes, home insurance, home maintenance, and any homeowners association fees.
- The funds from your reverse mortgage loan must first be used to pay off your existing mortgage on your home.
- Once your home mortgage is paid off, your lender will then pay you what remains from your new loan.
- The amount of money you receive from a reverse mortgage loan is based on the youngest borrower’s age, current interest rates, and your home’s appraised value.
- You are not required to make monthly principal and interest payments on the reverse mortgage, so you will be freed from the monthly mortgage payment expense.
What is a Reverse Mortgage?
A reverse mortgage is a special type of home loan that allows seniors over 62 to convert a portion of the equity in their dwelling into cash without having to make monthly mortgage payments.
For those homeowners who own their home outright, or who are coming close to the end of paying off the mortgage on their house, or who have a considerable amount of equity to withdraw from, can take out a portion of their equity to use.
A reverse mortgage is the opposite of a traditional or home mortgage loan.
With a traditional mortgage, you make payments each month to a lender.
With a reverse mortgage, the lender makes payments to you.
The portion of equity that seniors withdraw don’t have to pay it back as long as they continue to live in their home. And they don’t have to sell their home to the bank or move from their home. It’s only when they leave their home permanently do they have to repay the money they borrowed.
Since a reverse mortgage is just a type of loan, you retain ownership of your home.
And the lender doesn’t relinquish your title or your ownership rights to sell your home.
But you must maintain the home and pay your home dues.
Eligibility Requirements for a Reverse Mortgage
The primary homeowner must be age 62 or older to qualify for a reverse mortgage if you meet the following ten requirements:
- You must own your home outright or have at least 50% equity in your home or have a low balance on your home mortgage. But even if your home mortgage is a sizeable amount, you may still qualify for a reverse mortgage;
- You must pay off your existing home mortgage by using the money from your reverse mortgage;
- The home you reside in must be your primary residence, which you qualify if you live there more than half the year;
- You must remain current on home dues, which include:
- Property taxes
- Homeowners insurance that you are required to have by your home mortgage lender
- Homeowners association fees or dues;
- You must maintain your property, keep it in good working order, make necessary repairs and meet Federal Housing Administration (FHA) standards;
- You must have enough funds to afford future housing costs;
- You must have no delinquent federal debt;
- You must satisfy property requirements, such as a single-family home or multi-family home you live in;
- You cannot live in a mobile home or a manufactured home;
- If the home is a condo, it must be on the HUD/FHA approved condo list. If it is not, you may still be eligible for a proprietary reverse mortgage.
HUD is the Department of Housing and Urban Development that works with housing agencies to manage homes for the low-income.
Is There a Minimum Credit Score to Qualify for a Reverse Mortgage?
No, there is no minimum credit required to qualify.
While your credit history is looked at for a reverse mortgage, unlike a traditional mortgage or a refinance, your credit score isn't considered in the same way.
Because you won't be making monthly payments, your credit will not be as heavily weighted.
However, the lender still needs to ascertain that you don't have any outstanding federal debts or have a history of not making payments.
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What Types of Reverse Mortgages Are There?
There are, in fact, three different types of reverse mortgages, and each one fits a different financial need.
Home Equity Conversion Mortgage (HECM)
A HECM is the most popular type of reverse mortgage. HECMs are only offered by and only insured by the Federal Housing Administration (FHA)-approved lenders.
Despite that, HECMs are widely used and is the standard loan that borrowers often choose if they apply for a reverse mortgage.
|Funds can be used for any purpose||Higher up-front costs. HECM comes with several fees and charges. These include mortgage insurance premiums (initial and annual) third-party charges, origination fees and interest and servicing fees, all of which we’ll explain.|
|As the most used reverse mortgage, what could go wrong?|
|Borrowers receive funds from their lenders tax free|
|Heirs inherit any remaining equity after the reverse mortgage is paid in full|
Single-Purpose Reverse Mortgage
The loan is used less often than the other two and is offered by nonprofit organizations and state and local government agencies.
The loan is designed for just one purpose that’s outlined by the lender.
|It’s the lowest cost option among reverse mortgages.||You’ll receive a smaller loan.|
|Covers one specific purpose, such as a handicap accessible remodel, a home improvement, or to pay property taxes, for example.|
|The restriction on how you can spend your loan may turn you off from applying for a single-purpose mortgage.|
Proprietary Reverse Mortgage
A PRM is a private loan not backed by the government but instead is backed by private lenders. Unlike single-purpose reverse mortgages, PRMs usually don’t come with restrictions on how you can use the equity from your home.
|Best for homeowners whose homes have high values.||Like HECMs, proprietary reverse mortgages only allow borrowing a fraction of home equity, often around 50%.|
|Proprietary reverse mortgages provide larger loan amounts than permitted in relation to HECMs.||Unlike HECMs, propriety reverse mortgages may not offer multiple disbursement options, such as a monthly payment or line of credit. Instead, the funds are usually available only as a lump sum at closing.|
How Much Does a Reverse Mortgage Cost?
Just like a traditional mortgage, there are several fees associated with getting a reverse mortgage.
Closing costs for a reverse mortgage stand out because they are not cheap, but the majority of HECM mortgages allow homeowners to roll the costs into the loan.
That way, you don’t have to shell out the money upfront.
Doing this, however, reduces the amount of funds available to you through the loan.
Here are the most important fees to expect.
What is the Mortgage Insurance Premium (MIP) for a Reverse Mortgage
The upfront MIP is paid to the FHA when you close on the loan. It protects both you and the lender by turning the loan into a non-recourse loan.
A non-recourse reverse mortgage means that neither you nor your heirs are personally liable for any amount of the mortgage that exceeds the value of your home when the loan reaches its maturity or when the loan is repaid.
So if the borrower’s home sells for less than what is due on the loan, the MIP covers the difference so you don’t default on the loan and the lender doesn’t lose money as this is an investment for the lender.
At closing, the cost of the upfront MIP is 2% of the appraised value of the home or $726,535, which is the FHA’s lending limit, whichever is less.
For example, if you own a home that’s worth $250,000, your insurance premium will cost around $5,000.
In addition to an upfront MIP, the MIP comes up annually and accrues annually when the loan comes due. This charge is usually around .5% of the outstanding loan balance.
What is an Origination Fee?
The mortgage origination fee is the amount of money a lender charges to originate and process the loan.
Reverse mortgage lenders will charge more than $2,500 or else 2% of the first $200,000 of your home’s value (whichever is greater) in addition to 1% of the amount that’s over $200,000.
The FHA has set a minimum and maximum cost of the origination fee, so no matter what your home is valued, you will not pay less than $2,500 or up to $6,000, the latter being a capped fee.
The cap is set by law to keep closing costs reasonable for borrowers.
Are There Additional Fees For a Reverse Mortgage?
To monitor your HECM for the life of the loan, and for the lender to service and administer the loan, there is a monthly fee, which can cost up to $35 each month.
An Appraisal is Required
Not only required by HUD, and to determine the value of your home, an appraisal will be required.
Your appraisal will depend on the location and size of your home, but in general, the fee will cost you as low as $300 and as high as $500 or more.
Other Third-Party Fees You'll Be Responsible For
There are also third-party fees that you must pay.
|Credit report fees||$30-$50|
|Document preparation fees||$50-$100|
|Title search/title insurance||Varies on loan and location|
Expect to Pay Higher Interest Rates
Interest rates for your loan tend to be higher than, say, a traditional mortgage.
Your rate will vary depending on the lender you end up working with, the type of loan you get, and whether or not you get a fixed or adjustable-rate mortgage.
The difference between a fixed-rate and an adjustable interest rate is that, for fixed rates, the interest rate is set after you borrow your line of credit and will not change.
With an adjustable-rate mortgage, the interest rate can go up and down.
Bear in mind that interest rates, in general, will keep getting tacked on to the outstanding balance every month, so as time passes, the balance will keep going higher, according to the Federal Trade Commission.
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How Much Money Can You Get from a Reverse Mortgage?
The amount of money you can borrow, known as the principal limit, is based on the youngest borrower’s age or eligible non-borrowing spouse, current interest rates, and third-party fees as outlined above.
Borrowers will most likely receive higher principal limits the older they are, the more their property is worth, and the lower the interest rate.
But note that you should always anticipate receiving a loan from your reverse mortgage that is significantly lower in cost than the amount of equity you have in your home.
Your lender has to pay off your home mortgage, and if there’s a balance from a home equity loan on your house or a home equity line of credit (HELOC), those will have to be paid in full too.
Only then will the reverse mortgage lender pay you the remaining proceeds from your new loan.
On average, a 62-year-old will receive around 50% of their home’s appraised value.
A reverse mortgage calculator will help qualified homeowners get an estimate on what they can receive. Factors used are the current value of your house, the borrower’s age, and the current interest rate.
If you happen to own your home entirely, you’ll receive all of the proceeds from the loan since you don’t have a mortgage balance to pay off first.
There are three ways to receive your money: a lump sum, a monthly payment and a line of credit or a combination.
How to Apply for a Reverse Mortgage and How to Get the Best Deals
You should always shop around for a reverse mortgage lender. You need to find out which loan options they offer and their rate quotes by calling each one.
While on the call, some typical questions to ask are how much you qualify for, what are your payment options, whether or not there are restrictions on the funds you get and what fees do you need to pay upfront and during the life of the loan.
Often the potential borrower will look for a lender with the lowest interest rates and fees. That’s important and can help you decide which lender will be good for you.
However, you may have to do your homework. That lender with low interest rates may be charging more upfront.
The right choice depends on when you want to pay. That’s either upfront or over the course of the loan.
Also pay attention to customer service satisfaction. Scour online to find lender reviews and always check with the BBB to find out if a lender has any or a lot of complaints and negative comments from other homeowners.
To help you out, we did the work for you.
|The Appraisal||Get your home appraised to determine your home’s current value. Then you can determine exactly how much equity you have in your home..|
|Make Sure You Qualify||Ensure you meet the criteria to be eligible for a reverse mortgage. Check our requirements above.|
|Speak to the Experts||Undergo HUD-approved counseling|
|Fill Out Forms and Submit ID||Fill out 1009 form, which is required to apply for most reverse mortgages.|
|Closing||An underwriter then reviews your application and sets a closing date if everything is in order. Attend closing with a loan officer, your attorney and a notary.|
|Get Your Money||After a three-day rescission period, you will begin to get funds according to the terms of your reverse mortgage.|
When Do You Pay a Reverse Mortgage Back?
A reverse mortgage can be attractive since you aren’t required to make monthly payments until the loan reaches maturity and you can defer payment until you pass away, sell your home, or move out of your home permanently.
Importantly, with a reverse mortgage, you don’t have to sell your home after you cash out, meaning, you can continue to live in it.
Four scenarios when the loan comes due:
- The final home borrower moves out of the home in which the equity is drawn.
- If the borrower dies.
- If the borrower sells the house.
- If the borrower fails to pay taxes, insurance or neglects to maintain the home.
Will You Be Approved for a Reverse Mortgage?
To ensure qualification, lenders will check a borrower’s ability to repay their ongoing financial obligations.
You won’t have to meet the criteria required by other loans like a home mortgage. That means there is no credit-worthiness or income requirements. As long as you meet all the stipulations—living in the home, having enough equity—you will typically be able to secure a reverse mortgage.
However, if within the past 24 months you were late in paying property charges, credit cards or other consumer credit debt, or failed to make any sort of payments, you may not qualify.
Will a Reverse Mortgage Hurt Surviving Family Members or Heirs?
If you pass and your family wants to keep the home, or if you want to leave the home to your heirs, there is a hefty cost involved.
Your family must pay off the loan balance with their own money or else qualify for a home mortgage or a refinancing that will cover what is due.
If your heirs can’t come up with the funds, they may not be able to keep the home in the family.
Heirs to your home may be against the reverse mortgage, and having to pay it off, because they fear that the accrued interest on the home may have depleted their potential inheritance.
But what usually happens is that the borrower’s heirs still can receive a sizable amount of funds if the loan is paid off by selling the home.
If you want your heirs to keep the home indefinitely or for a long period of time, you have to consider how they’ll repay the reverse mortgage without selling the home. If you know in advance that they won’t have the funds, you may opt out altogether of getting a reverse mortgage.
If your heirs choose not to act, the reverse mortgage lender will have no choice but to foreclose on the home.
Can Your Spouse Live in Your Home If You Die?
If you are married, you and your spouse should both be listed as co-borrowers on the reverse mortgage loan.
This way, if you pass away or move out of your home for medical reasons, such as going to a retirement home, the other can continue living in the home and will be able to continue to receive funds derived from the reverse mortgage.
If your spouse is not a co-borrower, the spouse is called an Eligible Non-Borrowing Spouse, which means the spouse can also remain in the home after you have passed away under the law stipulated by HUD.
Do You Have to Participate in A Consumer Information Session?
HUD requires you to have counseling by a HUD-approved counselor.
Both HUD and the FHA need for you to understand how the loan from your equity works. A counselor can inform you on the pros and cons of reverse mortgage and how this kind of loan might impact your spouse or heirs after you pass away.
HUD requires all reverse mortgage applicants to receive independent third-party counseling by phone or in person.
This requirement stands out because some borrowers feel it’s not necessary. But until you complete your counseling session, only then will you receive a certificate of completion signed and delivered to the lender you plan on using.
To find a HUD-approved counseling agency, you can visit HUD’s online locator or call HUD’s Housing Counseling Line at 800-569-4287.
Why a Reverse Mortgage Might Not Work for You
First, take into account how long you plan to live in your home.
If you can foreseeably remain in your house and the reverse mortgage helps you to live in it more comfortably, then it may be just for you.
But if you plan to move within a few years—or even sooner—a reverse mortgage is not recommended.
An example is someone who may require imminent care in a nursing home or an inpatient facility.
It’s also not recommended if maintenance expenses, homeowners insurance, and property tax bills become difficult to pay.
On top of that, if you fall behind paying these, your reverse mortgage lender may force you to pay off the loan right away.
Worse, you're required to pay off the entire loan if you decide to move out soon.
In sum, reverse mortgages are made for those seniors who plan to remain in their homes for quite a while or until death.
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Can You Get Out of a Reverse Mortgage?
Do you want out of your reverse mortgage because you realized you can get a better deal elsewhere?
Or did you come to the belated conclusion that you really don’t need the funds from a reverse mortgage to live on?
Maybe you have buyer’s remorse and find that the terms of the reverse mortgage are just not right for you.
It’s possible that you can get out of a reverse mortgage anytime and, best of all, without penalty. Here’s how to do it.
You have a 3 day right to get out of a reverse mortgage after you receive your loan documents with no costs even after you sign.
To get rid of your commitment, you can do so anytime and again with no costs to you by refinancing into a traditional or conventional loan, paying off with other funds, or simply selling your home.
Taking out a conventional loan is an easy way to repay the reverse mortgage.
Refinancing your existing reverse mortgage into a new reverse mortgage with a lower interest rate will give you enough funds to pay off the initial reverse mortgage.
However, you will be faced with more high-priced closing costs if you refinance or take out a new loan.
If you can’t afford to repay your loan in one lump sum, you can make partial prepayments to reduce the funds owed later on. And you may able to do this without your lender charging you a penalty.
There are many more reasons why you would want to be freed from a reverse mortgage. Below are the top disadvantages of a reverse mortgage.
Disadvantages of a Reverse Mortgage
Borrowing against the equity in your home means you’ll increase your amount of debt and decrease the funds you ultimately receive.
If you don’t make payments to your loan, the loan balance will increase over time as interest accumulates.
You may not be able to pass your home to your heirs without them having to pay a cost.
Your loan can come due if you fail to follow the responsibilities of the loan, including keeping the home in good shape and order and paying your property taxes and homeowners insurance.
Your loan may have high closing costs
Your loan may have additional third-party fees such as a loan origination fee and an appraisal fee.
Importantly, if you take out the funds, you may no longer be qualified for government programs or benefits such as Medicaid or Supplemental Security Income.
But note that a reverse mortgage will never affect your Medicare or Social Security benefits.
Interest paid on a reverse mortgage can't be deducted from your annual tax return until the loan is paid off.
The interest rate on your loan starts immediately and the amount you owe will go up every month, day, and year until the loan is finally paid off.
As home equity is used, fewer assets are available to leave to your heirs.
Is There an Alternative to a Reverse Mortgage?
Depending on what your needs are, the following loans might be suitable alternatives to a reverse mortgage.
If you don't need to borrow the full equity from your home, you can opt for a personal loan, a HELOC (home equity line of credit), or a home equity loan.
Believe it or not, many lenders are willing to lend up to $100,000 in a personal loan, given that the applicant qualifies according to the given criteria.
Generally, APRs tend to be a bit higher for personal loans than a traditional mortgage.
You'll need to make sure you have great credit to qualify for the best rates.
HELOCs are a very popular choice for many homeowners who either need to pay off debts, want to renovate their home or finance a big purchase (such as a downpayment for another home) or project.
The line of credit given to the borrower is put against the equity already put into the home.
As with a reverse mortgage, you cannot take out beyond the equity you have already put in.
However, unlike a reverse mortgage, you make monthly payments as with any loan or creditor.
You use a HELOC much like you would a credit card. There is a set limit (based on your home equity), but you can take out this money whenever you want.
While, interest rates can vary with HELOCS, it is possible to lock in a rate for the remaining life of your mortgage.
Home Equity Loan
Home equity loans are very similar to HELOCs or reverse mortgages in that the loan is also secured against the equity you have in your home.
However, it's far more like taking out a mortgage or even a personal loan, in that you are taking out one particular amount at one particular time.
In fact, it's sometimes called a second mortgage.
Home equity loans entail fixed interest rates, and these rates are usually lower than personal loans or credit cards.
Conclusion on Reverse Mortgages
Reverse mortgages can be a great way for seniors to pad up their retirement budget, especially if they have to live on a fixed income.
It's a way for them to benefit from their mortgage payments throughout their life and capitalize on their home's value.
This can especially work if you don't plan on passing down your home to your heirs, and/or have their homes fully paid off.
The best part is that your surviving spouse can still continue to live in the home, even if you pass.
Nevertheless, important considerations are thinking about when the loan comes due.
You'll also need to be sure your home retains its value if you plan on selling it off to repay the loan.
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