- Introduction
- Basics
- Common Uses
- Program Details
- 8 Myths
- FAQ's
Reverse Mortgages - Introduction
What is a reverse mortgage?
If you are over the age of 62 and have paid off more than 35% of your mortgage balance, a reverse mortgage will allow you to borrow against the equity in your home. Instead of continuing to make mortgage payments, you get paid back the money you already have in it - that's the "reverse" part.
You never have to repay the loan as long as you live in your home and you can choose to receive the cash disbursements as monthly income, a line of credit, or a lump sum. Also, because the FHA/HUD program is backed by the US government, you will never owe more than the value of your home — even if you receive monthly payments for the next 20 years. Finally, you keep title to your property — it stays part of your estate.
Basics of Reverse Mortgages
1. Benefits
You retrieve the equity you have in your home as a lump sum of cash, monthly payments, or a line of credit. You never need to repay the reverse mortgage as long as you live in the home. Your existing mortgage (if you have one) will be fully paid off. The disbursements are tax-free and can be spent however you like with no impact on Social Security or Medicare benefits.
- Continue to live in and own your home
- Receive tax-free income from the cash disbursements
- Choose from monthly income, a line of credit, or a lump sum
- Repay the loan at any time with no penalty
- Owe nothing as long as you occupy your home
- No personal liability for repayment of the loan since it is secured solely by your home (you and your heirs are not personally liable)
- Pass the remaining equity in your home to your heirs
2. Eligibility
In order to qualify, all homeowners must be age 62 or older. Furthermore, we recommend that you have paid off 40% or more of your mortgage. Finally, you should be planning to stay in your home for at least several years. There are no income or credit requirements.3. Cost
The cost of an FHA HUD reverse mortgage (HECM) is considerably lower than buying and moving to a new home. Interest rates are usually lower than the best rates on a traditional mortgage. All costs are packaged into the reverse mortgage so you never have out-of-pocket expenses.4. Liability of Estate
Your heirs are never personally liable for the reverse mortgage since it is secured solely by the equity in your home. Your heirs inherit the property and have the option to sell it or refinance with a traditional mortgage.5. Repayment
You owe nothing as long as one homeowner lives in your home. Also, the FHA mortgage insurance ensures that you can never owe more than the sale-price of your home, even if the home depreciates. When you move out of the home, your estate has up to 12 months to repay the loan (usually by selling). If the home sells for more than the loan balance, the remaining equity passes to your heirs.What can a reverse mortgage be used for?
After you receive the tax-free funds from your reverse mortgage, it is up to you to use them however you please. Some retirees choose a reverse mortgage to have peace of mind and others want to improve their quality of life.
Common Uses for a Reverse Mortgage (AARP and HUD survey)
Program Details
1. Eligibility Requirements
There are no income, employment, or credit requirements!
- All homeowners must be at least age 62 and occupy the property as their primary residence.
- The home can have an outstanding mortgage (it will be paid off).
- Houses, town homes, condominium units, and some mobile homes and PUD's are eligible. Most co-ops are eligible in New York.
- The home must meet minimum HUD property standards. If not, sometimes repairs can be made after the closing of the reverse mortgage.
2. Cash Disbursement Options
You can choose to receive any combination of these options:
- Lump Sum
- Cash is available immediately
- Cash is available immediately
- Term
- Equal monthly payments for a fixed number of months
- Equal monthly payments for a fixed number of months
- Tenure
- Equal monthly payments for as long as at least one homeowner lives in the property
- Equal monthly payments for as long as at least one homeowner lives in the property
- Line of credit
- A credit line that you can draw upon whenever you wish
3. Loan Repayment
The loan is due when the last borrower no longer occupies the property as the principal residence. At this point, the loan may be repaid either by sale of the home or through other resources (such as savings or applying for a new traditional mortgage).
If your heirs choose to sell the home, they will keep the remainder of the income from the sale after the loan has been repaid. Your estate has up to 12 months to repay the loan. This means your heirs can take their time to get the best sale price.
How popular are reverse mortgages?
The program is growing at 49% annually with 107,000 loans issued in 2007. It was started by the FHA and signed by Ronald Reagan in 1988. Reverse mortgages began to be popular in 1999 when policy changes lowered interest rates and cut closing costs.
The Reverse Mortgage Process
Your counselor will explain the legal and financial obligations of a reverse mortgage and help you explore alternatives. At the end of the counseling session, you will receive the "Certificate of Borrower Counseling" that's needed to begin an application.
Top 8 Myths of Reverse Mortgages
- I would be selling my house to the bank
- FALSE You keep the title to your house. The lender will add a lien on the property but you will still have complete control over it.
- FALSE You keep the title to your house. The lender will add a lien on the property but you will still have complete control over it.
- My heirs won't inherit anything
- FALSE Your estate only owes the balance on the reverse mortgage. The balance is however much you've spent and interest.
Let's say you got a reverse mortgage and owed $50,000 after 5 years. Then you decided to sell the house for $250,000. The lender gets $50,000 and you get $200,000.
- FALSE Your estate only owes the balance on the reverse mortgage. The balance is however much you've spent and interest.
- I might "outlive" the loan
- FALSE FHA/HUD reverse mortgages are designed specifically so that you can't outlive the loan. When you get the reverse mortgage, the lender will charge you 2% to purchase mandatory FHA mortgage insurance. That insurance guarantees that even if you live to be 100, you can never owe more than the value of your home and you can never be forced to leave.
- FALSE FHA/HUD reverse mortgages are designed specifically so that you can't outlive the loan. When you get the reverse mortgage, the lender will charge you 2% to purchase mandatory FHA mortgage insurance. That insurance guarantees that even if you live to be 100, you can never owe more than the value of your home and you can never be forced to leave.
- I could get forced out of my home
- FALSE FHA/HUD reverse mortgages specifically state that you can not be forced out of your home.
- FALSE FHA/HUD reverse mortgages specifically state that you can not be forced out of your home.
- Social Security and Medicare will be affected
- FALSE Money from a reverse mortgage is not considered income because it is a loan. For this reason, a reverse mortgage does not lower Social Security and Medicare benefits.
- FALSE Money from a reverse mortgage is not considered income because it is a loan. For this reason, a reverse mortgage does not lower Social Security and Medicare benefits.
- I would have to pay taxes on the reverse mortgage
- FALSE You already paid taxes on the money when you were putting the equity into your home. When you take it out again, it is not taxable.
- FALSE You already paid taxes on the money when you were putting the equity into your home. When you take it out again, it is not taxable.
- There are big out-of-pocket expenses
- FALSE All of the costs, whether closing costs or interest, are financed. That means there are never out-of-pocket expenses at any point in the reverse mortgage.
- FALSE All of the costs, whether closing costs or interest, are financed. That means there are never out-of-pocket expenses at any point in the reverse mortgage.
- A reverse mortgage is similar to a home equity loan
- FALSE First, home equity loans may have many requirements such as high income, low debt, and good credit that a reverse mortgage does not.
Second, you can "outlive" a home equity loan and end up being foreclosed on by the bank. This can never happen with a reverse mortgage.
Third, a reverse mortgage usually has significantly lower interest rates.
- FALSE First, home equity loans may have many requirements such as high income, low debt, and good credit that a reverse mortgage does not.
Common Questions and Answers
I have a $200,000 home. If I get a reverse mortgage and spend
$50,000 then pass away, does the bank get my house?
No. Your estate would sell the house for $200,000. The estate would pay the bank $50,000. The other $150,000 goes to your heirs.
My spouse is not 62. What can I do?
In some cases, the younger spouse can be removed from the title using a "quit claim deed." However, there are significant risks to consider such as what will happen if the older spouse passes away prematurely.
How popular are reverse mortgages?
The program is growing at 49% annually with 107,000 loans issued in 2007. It was started by the FHA and signed by Ronald Reagan in 1988. Reverse mortgages began to be popular in 1999 when policy changes lowered interest rates and cut closing costs.
Am I qualified for a reverse mortgage if I have an existing loan?
Yes. The existing loan will be paid off during the closing.
Will my heirs be forced to sell my home?
No. If they decide to keep it, they can refinance the property with a traditional mortgage. Otherwise, they may sell the house and use the proceeds to repay the loan balance and keep the difference.
Can the lender take my home away if I outlive the loan?
No. You can not "outlive" the loan. As long as one borrower continues to live in the home and keeps taxes and insurance current, you can not be evicted, foreclosed, or asked for repayment.
Will a reverse mortgage affect my public benefits?
A reverse mortgage will not affect Social Security or Medicare but may affect Medicaid. You should seek specific advice on your situation.