Reverse Mortgage

A reverse mortgage is a loan that allows you to get money from your home equity without having to sell your home. If you’re at least 62, a reverse mortgage could be an option. However, this loan is a bit more complicated and can come with some drawbacks. It’s important to know how this loan works, how it can help you and whether it’s the right option for your financial situation and retirement goals. Call Today!

What is a reverse mortgage?

A reverse mortgage is a loan that allows seniors to borrow a portion of their home’s equity. They then receive that equity in cash — either in one upfront sum after closing, via regular monthly payments or by taking withdrawals as needed.

Reverse mortgages only come due when the borrower dies, lives outside of the house for more than 12 months (unless a co-borrower or eligible spouse is living in the property), sells the property or stops paying taxes and homeowners insurance.

Many older homeowners use reverse mortgages to supplement their income in retirement. Reverse mortgages can also help reduce monthly housing expenses (there’s no more monthly payment), increase cash flow or pay for home repairs or improvements for seniors aging in place.

How do reverse mortgages work?

Reverse mortgages are a negative amortization loan. That means the loan balance grows over time. For instance, you may borrow $100,000 upfront, but by the time you pass away or sell your home and move, you will owe more than that, depending on the interest rate on the reverse mortgage.

There are five ways to have the funds from a reverse mortgage distributed to you:

Lump sums

You can take the cash you’re entitled to upfront. But you’re required to take the amount in two sums, with the second coming a year after the first. Typically, these types of reverse mortgages come with a fixed interest rate on the outstanding balance.

Term payment

You can receive funds monthly for a specified period. These monthly payments are typically larger than a tenure payment. The interest rate is also adjustable.

Credit line

Under this scenario, you don’t take any cash at all. Instead, you have a line of credit you can draw on at any time. The credit line also grows over time based on its adjustable interest rate.

Mix and match

You can also combine the above options. For example, you can take an upfront lump sum, say $10,000, and then choose to take $500 a month term payment. If you want to change the options later, you can do this is by paying an administrative fee.

Tenure payment

You can receive the funds as a monthly payment that lasts as long as you stay in the house. This reverse mortgage generally has an adjustable interest rate.

Types of reverse mortgages

Most reverse mortgages are government-insured loans. Like other government loans, like USDA or FHA loans, these products have rules that conventional mortgages don’t have, because they’re government-insured. These include eligibility criteria, underwriting processes, funding options and, sometimes, restrictions on uses of funds. There are also private reverse mortgages, which do not have the same strict eligibility requirements or lending standards.

Reverse mortgage pros and cons

Before you sign on the dotted line, consider the reverse mortgage pros and cons:

Pros

You can stay in your home longer with no monthly mortgage payment
You’ll have more choices for how to tap your equity than regular mortgages
You can add to your retirement income and leave other retirement accounts alone
You can pay off debt or have a rainy day fund for unexpected medical expenses
You won’t pay taxes on reverse mortgage money you receive
You’ll protect your heirs from inheriting an underwater home

Cons

Your home’s equity will shrink every month
You’ll pay high reverse mortgage closing costs
You may disqualify yourself from other income benefits
Your heirs will inherit less
You could lose your home to foreclosure if you can’t live in the home
You won’t get a tax deduction on the reverse mortgage interest until all or part of the balance is repaid

Is a reverse mortgage a good idea?

A reverse mortgage is a good idea if you fully understand the pros and cons listed above, and don’t have other financial resources to retire comfortably. The table below provides some reverse mortgage food for thought:

A reverse mortgage may be a good idea if:

You currently have no mortgage, or a very low mortgage balance
You’re underfunded for retirement
You don’t have enough income for a regular mortgage or home equity loan
Your retirement income is very low
You plan to stay in your home

A reverse mortgage may not be a good idea if:

You plan to move out of your home
You can’t afford to maintain your home
Home values are dropping in your area
You’re being pressured by someone to get one
Interest rates are rising

Alternatives to a Reverse Mortgage

There are other ways for seniors to unlock the equity they built up in their homes over the decades without taking out a reverse mortgage. If you need the equity for your retirement years, it’s key to consider all options.

Downsize: You can sell your current home and buy a cheaper apartment, condominium or smaller house to extract equity. The downside is giving up the family home. But potential upsides include moving closer to family and purchasing a home more suitable for aging in place.
Refinance: You can either refinance or take out a new mortgage if you don’t have an existing one and cash out some of the equity. The advantage is that you can tap only what you need, but you still have monthly payments.
Loan or HELOC: You could also borrow against your home equity using a home equity loan or line of credit. A loan allows you to take a lump sum upfront that you pay back in installment payments. With a line of credit, you can borrow from it at any time, up to the maximum amount. You also have to make minimum monthly payments after you borrow from the line of credit.

How much money can you get from a reverse mortgage?

You can borrow up to the principal limit on a reverse mortgage based on your age, the interest rate on your loan and the appraised value of your home. You can use a reverse mortgage calculator for a quick estimate of the lump sum amount you might qualify for if you have the following information handy:

Your age
Type of property you own (single-family, townhome, condo or multifamily or manufactured home)
Your home’s value
Your current mortgage balance (if any)
Whether the home is your primary residence
Your home’s ZIP code

To calculate term and line of credit options, it’s best to contact reverse mortgage loan officers who have specialized loan software to do the calculations for you.

According to the Consumer Financial Protection Bureau (CFPB):

Older borrowers with higher-priced homes and lower rates will get more reverse mortgage money
Younger borrowers with lower-priced homes and higher rates will get less reverse mortgage money

How much does a reverse mortgage cost?

The closing costs for a reverse mortgage aren’t cheap, but the majority of HECM mortgages allow homeowners to roll the costs into the loan so 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’s a breakdown of HECM fees and charges, according to HUD:

Mortgage insurance premiums (MIP) – There is a 2 percent initial MIP at closing, as well as an annual MIP equal to 0.5 percent of the outstanding loan balance. The MIP can be financed into the loan.
Origination fee – To process your HECM loan, lenders charge the greater of $2,500 or 2 percent of the first $200,000 of your home’s value, plus 1 percent of the amount over $200,000. The fee is capped at $6,000.
Servicing fees – Lenders can charge a monthly fee to maintain and monitor your HECM for the life of the loan. Monthly servicing fees cannot exceed $30 for loans with a fixed rate or an annually adjusting rate, or $35 if the rate adjusts monthly.
Third-party fees – Third parties may charge their own fees, as well, such as for the appraisal and home inspection, a credit check, title search and title insurance, or a recording fee.

Keep in mind that the interest rate for reverse mortgages tends to be higher, which can also add to your costs. Rates can vary depending on the lender, your credit score and other factors.

Who qualifies for a reverse mortgage?

There are certain criteria you’ll need to meet to qualify for a reverse mortgage, according to Steve Irwin, President of the National Reverse Mortgage Lenders Association (NRMLA):

Age qualification: All borrowers listed on title must be 62 years old. If one spouse is under 62, it might be possible to get a reverse mortgage. However, the loan officer will need to collect additional information upfront to determine eligibility.
Primary lien: A reverse mortgage must be the primary lien on the home. Any existing mortgage must be paid off using the proceeds from the reverse mortgage.
Occupancy requirements: The property used as collateral for the reverse mortgage must be the primary residence. Vacation homes and investor properties do not qualify.
Taxes and Insurance: Borrowers must remain current on property taxes, homeowners insurance, homeowners association fees, and any other necessary costs related to owning your property.
Property Condition: Borrowers are responsible for completing mandatory repairs and maintaining the condition of the property.
Property type: Eligible property types include single-family homes, 2-4 unit properties, manufactured homes (built after June 1976), condominiums, and townhouses. Co-ops do not qualify.
Debt: Borrowers must not have any outstanding federal debt you’re delinquent on, like an unpaid tax bill.
Counseling: Borrowers must take part in a reverse mortgage counseling session so you understand what you’re signing up for.

How you can use a reverse mortgage

Reverse mortgages give you the flexibility to use your home equity in a number of different ways. With a Home Equity Conversion Mortgage (HECM) you can:

Pay off your current mortgage and other expenses to reduce your monthly expenses
Remodel your home to accommodate changing health and age limitations
Keep a line of credit for unexpected expenses and financial emergencies
Pay for health insurance until you’re eligible for Medicare coverage or Social Security income
Supplement your retirement income
Pay for long term care and health needs
Pay for transportation if you’re unable to drive
Pay for a child or grandchild’s college or professional education

How Do You Pay Back A Reverse Mortgage?

How you pay back a reverse mortgage varies depending on two main factors:

If you have a HECM and sell your home: If owners decide to sell their home after taking out a reverse mortgage, they must use the proceeds from this sale to pay off their loan. If the home sells for less than what the owners owe on the loan, they won’t be responsible for making up the difference as long as they have a HECM.
If you have a HECM and pass away: Your reverse mortgage must be paid off if you pass away. In this case, your heirs can sell your home and use the proceeds to pay off the reverse mortgage. They can also give the home to your lender. If they want to keep your home, they’d have to purchase the home.
If you move out of the home: You must live in the home as your primary residence for more than half the year. If you move out of the home, the reverse mortgage will come due. You’ll need to pay back the loan even if you wish to keep the home. That could be done with your own funds or by refinancing the loan.

Reverse Mortgage vs. Refinance: Which Is Better?

While a reverse mortgage can supplement your income as you age, this type of financial tool might not be your best choice. There are times when you might consider alternatives to a reverse mortgage, especially if you want to leave your home to your children after you die or if you plan on selling the property.

You might instead consider refinancing options for seniors and the different types of mortgage refinancing that could be a better alternative to a reverse mortgage.

A cash-out refinance is one such option. Most people refinance to lower their interest rate or shorten or lengthen the term of their existing mortgage loan. A cash-out refinance, though, can also provide you with a lump sum of cash that you can spend on anything.

In a cash-out refinance, you’ll refinance for an amount higher than what you owe on your mortgage. Say you owe $100,000 on your mortgage and your home is worth $200,000. You might refinance for $170,000. You then receive that extra $70,000 as a lump sum payment. You’ll have to repay the full $170,000 that you’ve borrowed in regular monthly payments with interest. But if you pay off your new mortgage loan before you die, you can leave your home to your heirs without worrying about forcing them to pay off a reverse mortgage to gain the property.

Remember: If you pass away before repaying your new mortgage, your heirs would have to pay off that loan before taking over possession of your home.

Get Reverse Mortgaga

If you are 62 or older, a reverse mortgage is a great way to take advantage of the equity in your home without having to sell your home, and eliminate your monthly mortgage payment. Talk to a reverse mortgage specialist today! Call Us!