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What is a reverse mortgage?
A reverse mortgage is a loan that enables senior homeowners, ages 62 and older to convert part of their home equity into tax-free* income—without having to sell their home, give up title to it, or make required monthly mortgage payments. Borrowers can use the funds almost any way they choose.
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How is a reverse mortgage like a home equity loan? How is it different?
Both a reverse mortgage and a home equity loan use the equity you have built up in the home to provide you with readily available cash.
They differ in that with a home equity loan you must make regular monthly payments of principal and interest. However, with a reverse mortgage you are not required to make monthly mortgage payments. Repayment of the loan is also not required until the last borrower on title moves, sells the property or becomes deceased*.
* It is important to note that the borrower must adhere to loan responsibilities as agreed upon at closing: reside in the home as primary residence, pay for property charges such as taxes, hazard insurance and homeowner association dues, maintain the property in reasonable condition and make required repairs. Failure to meet these responsibilities may result in the loan becoming due and payable.
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Can my current income influence my ability to get a reverse mortgage?
No. Since reverse mortgage borrowers are not required to make monthly mortgage payments, there are no income qualifications.
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What are the advantages of a reverse mortgage?
There are many. Here are a few of the most significant:
• Remain independent. A reverse mortgage allows you to remain in your
home and retain home ownership.
• No monthly mortgage payments required. Repayment of the loan is not
required until the last borrower on title moves, sells the property or becomes
deceased*.
• Tax-free money. Currently the Internal Revenue Service treats monies
received from a reverse mortgage as loan advances and not taxable income;
however, you should consult your professional tax advisor for any affect on
taxes or other possible benefits.
• Freedom and flexibility. The money you get from a reverse mortgage is
yours to use in any way you choose.
* It is important to note that the borrower must adhere to loan responsibilities as agreed upon at closing: reside in the home as primary residence, pay for property charges such as taxes, hazard insurance and homeowner association dues, maintain the property in reasonable condition and make required repairs. Failure to meet these responsibilities may result in the loan becoming due and payable.
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I've heard that with a reverse mortgage the lender would own my home. Is this true?
It's absolutely false. The borrower retains title to the property. The reverse mortgage lender is merely extending a loan to the borrower.
Because the homeowners retain title, they remain responsible for the payment of property taxes, hazard insurance, and maintaining the home in reasonable condition - just as they would with a standard first mortgage or home equity loan.
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Can I refinance a reverse mortgage, as I would be able to do with a traditional home mortgage?
Yes. Refinancing can make sense if your home either increases in value, the interest rates drops or the maximum lending limit increases. Keep in mind that when deciding to refinance a reverse mortgage, it is important to compare the amount of benefit versus the cost of the loan before making this decision. The amount of benefit received should be twice the amount of the cost to refinance the loan.
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Can a reverse mortgage lender take my home away if I outlive the loan?
No they cannot. And the loan is not due at that time either. In fact, you don't need to repay the loan as long as you or another borrower continues to live in the house as the primary residence and keep the taxes paid and hazard insurance in force.
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How do you determine the amount of cash I am eligible for?
The amount you can borrow depends on several factors, including the age of the borrower(s), either the lower of the appraised home value or the Federal Housing Administration (FHA) lending limit, the amount of any mortgage or liens against the property, loan costs and current interest rates.
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Are there any limits on how I use the money I receive from a reverse mortgage?
You can use the money for virtually anything you choose, from daily living expenses, home improvements, healthcare expenses, paying off existing debts, or simply enhancing your retirement years. For many people, the money provides a "financial security blanket," in case unexpected expenses arise.
It is important to know that with adjustable rate mortgages, an increase in the interest rate could affect the amount of money available to borrow in the future and the amount of money owed when the loan becomes due.
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Is there a choice in how I receive the cash from my reverse mortgage?
Most definitely. With most reverse mortgages you have a wide range of payment options, one of which may be ideal to meet your financial needs.
- You can choose to receive the money all at once, as a lump sum.
- You can receive equal monthly payments as long as one of the borrowers lives and continues to occupy the property as a principal residence.
- You can choose to receive equal monthly payments for a fixed period of months.
- You can get a line of credit; which allows you to take funds at times and in amounts of your choosing until the line of credit is exhausted. This is the most popular option, chosen by more than 60% of reverse mortgage borrowers.
- You can opt for a combination of line of credit with monthly payments for as long as the borrower remains in the home.
- Or, finally, you can choose a combination of the above.
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Who can qualify for a reverse mortgage?
To qualify for a reverse mortgage each borrower on title must be 62 years or older and occupy the home as their principal residence. There are virtually no income or credit qualifications with a reverse mortgage. Eligible home types include single-family detached; FHA approved condo and PUD complexes; and 1-4 units if one unit is owner occupied. Manufactured and mobile homes have additional restrictions.
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I still owe money on a first or second mortgage. Can I still get a reverse mortgage?
Yes, but existing mortgages must be paid off at closing. The proceeds from the reverse mortgage may be used for that purpose. This eliminates a required monthly mortgage payment and helps cash flow.
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Can I get a reverse mortgage on a second home or resort property I own?
Unfortunately no. Reverse mortgages may only be taken out on your primary residence.
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What kinds of homes are eligible for a reverse mortgage?
First and foremost, the reverse mortgage must be on the borrower(s) primary residence, that is, where they live most of the year. Most reverse mortgages are taken on single family, one-unit homes. Eligible home types include single-family detached; FHA approved condo and PUD complexes; and 1-4 units if one unit is owner occupied. Manufactured and mobile homes have additional restrictions. Click here to contact the Financial Freedom representative nearest you to determine if your home is eligible.
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Would a home that is in a "living trust" be eligible for a reverse mortgage?
Yes. In most cases a homeowner who has put his or her home in a revocable living trust can usually take out a reverse mortgage, subject to review and approval of the trust documents.
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When will I have to pay the principal and interests cost of this loan?
The loan is due and payable when the last borrower on title sells the property, permanently leaves the home, or passes away. Until one of these events takes place the borrower(s) live in their home and no monthly mortgage payments are required. Borrower must adhere to loan responsibilities as agreed upon at closing: reside in the home as primary residence, pay for property charges such as taxes, hazard insurance and homeowner association dues, maintain the property in reasonable condition and make required repairs. Failure to meet these responsibilities may result in the loan becoming due and payable.
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What is a non-recourse loan?
A non-recourse loan is a home loan in which a lender may look only to the value of the home for repayment of the loan; no other assets may be attached if the loan balance grows beyond the subject property home value.
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If I take a reverse mortgage, will I still have an estate that I can leave to my heirs?
The amount of equity remaining in your home will depend on many factors such as the initial amount disbursed when the reverse mortgage was first originated, additional amounts received either through monthly payments or line of credit, interest rates and fees over the life of the loan, length of time in the reverse mortgage is open and the value of your home at the time of sale.
It's important to remember that by using your home equity early on during the life of the loan, you are potentially reducing or eliminating the ability for your home to provide for you or your heirs in the future. The more you borrow early on, the greater the interest and charges are over the life of the loan.
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When the loan is due, will I ever owe more than my home is worth?
As stated earlier, a reverse mortgage is a non-recourse loan in which a lender may only look to the value of the home for repayment when the last borrower on the loan permanently leaves the home (loan maturity); no other assets may be attached if the loan balance grows beyond the mortgaged home value.
If you or your heirs wish to retain the property, then the full amount of the loan must be paid regardless of property value. However, in cases where the property value is less than the amount owed, you or your heirs may choose to release the property to the servicer and therefore you would not be responsible for any difference between the amount owed and the value of the property.
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What are the upfront costs associated with a reverse mortgage?
Many of the same costs that one pays to purchase or refinance a home apply to reverse mortgages as well. One can expect to be charged an origination fee, mortgage insurance premium (payable to HUD for insuring the HECM reverse mortgage), an appraisal fee, and certain other standard loan costs such as title charges. Many of these fees and costs are regulated by HUD. The federal government also requires prospective borrowers to receive independent counseling from a HUD-approved reverse mortgage counselor of their choosing prior to obtaining this product. The counseling fee may be an upfront out-of-pocket fee.
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Are reverse mortgage interest rates fixed or variable?
Most reverse mortgages extended to seniors to date have variable rates that are tied to a financial index and will vary according to market conditions. In addition, Financial Freedom offers a fixed rate HECM program.
Click here to learn more about Financial Freedom's Suite of HECM Products.
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What is "TALC" and why should I know about it?
TALC is short for "Total Annual Loan Cost." It combines all of the costs of a reverse mortgage into a single annual average rate and can be very useful when comparing one type of reverse mortgage to another. If you are considering a reverse mortgage, be sure to ask the lender and counselor to explain the TALC rates for the various reverse mortgage products.
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