Frequently Asked Questions About How a Reverse Mortgage Works
What is a reverse mortgage?
A reverse mortgage is a non-recourse home loan that enables seniors to convert a portion of their equity into tax-free* cash flow. The borrower remains in the comfort of their own home without having to sell, give up title, or make monthly payments.** There are several items that can cause the loan to become due and payable.
*always consult your tax advisor
**Homeowner must continue to pay insurance, taxes, and basic maintenance of home to keep loan in good standing. Non payment of taxes and insurance could result in foreclosure.
Does the reverse mortgage lender own my home?
The borrower retains title to the property. The reverse mortgage lender is merely extending a loan to the borrower.
The homeowners are responsible for the payment of property taxes, hazard insurance, and maintaining the home in reasonable condition. Non-payment puts your home at risk of foreclosure.
What are the benefits of a reverse mortgage?
Thousands of people each month improve their lives by taking advantage of a reverse mortgage to increase their monthly cash flow.
* – Eliminate debt such as credit cards, car loans or existing mortgages.
* – Ease worries by having extra cash available to spend each month
* – Access extra cash to renovate or remodel your home
* – Create that dream kitchen or bathroom (or both) you’ve always wanted
* – Have extra money to travel
How is it determined how much money is available for me?
The amount of funds you are eligible to receive depends on you age (or the age of the youngest spouse in the case of couples), the appraised home value, interest rates, and in the case of the government program, the lending limit in your area. In general, the older you are and the more valuable your home, the more money you can get. Visit our reverse mortgage calculator to determine how much you qualify for.
What property types are eligible?
Eligible property types include single-family homes, 2-4 unit properties, manufactured homes (built after June 1976 and meet FHA requirements), condominiums, and townhouses. In general, cooperative housing is ineligible. However, some lenders have developed private programs that lend on co-ops in New York.
What payment plans are available?
You can choose to receive the proceeds from a reverse mortgage all at once as a lump sum, fixed monthly payments either for a set term or for as long as you live in the home, as a line of credit, or a combination of these. The most popular option – chosen by more than 60 percent of borrowers – is the line of credit, which allows borrowers to draw on the loan proceeds at any time. On a fixed rate reverse mortgage, all the proceeds available to you need to be drawn at closing.
There are limits to the amount of funds utilized in the first year of the loan. During the first 12 months after closing, you cannot access more than 60 percent of the available loan proceeds. In month 13, you can access as much or as little of the remaining funds as you wish. A fixed rate loan will not allow for further draws beyond closing though.
There are exceptions to the 60 percent rule. If you have an existing mortgage, you may pay it off and take an additional 10 percent of the available funds, even if the total amount used exceeds 60 percent.
How does the credit line growth feature work? Do the borrowers earn interest?
A common misconception about the line of credit is that the borrowers will be earning interest. This is absolutely not true, although many “professionals” will lead their clients to believe they do earn interest. What is really happening is the unused portion of the line of credit will grow at a percentage equal to the interest rate, which increases the amount of money available to the borrower in their line of credit.
How can I use my reverse mortgage proceeds?
There are no limitations on how the loan proceeds can be used. Supplement retirement income to cover daily living expenses, repair or modify a home, pay for health care, pay off existing debts, buy a new car or take a “dream” vacation, cover property taxes, and prevent foreclosure. Visit our reverse mortgage proceeds section.
How does the interest work on a reverse mortgage?
With a reverse mortgage, borrowers are charged interest only on the proceeds that they receive. Most reverse mortgages charge a variable interest rate (although we do offer fixed rate reverse mortgages) that is tied to an index, such as the 1-Yr. Treasury Bill or the London Interbank Offered Rate (LIBOR), plus a margin that typically adds an additional one to three percentage points onto the rate they’re charged. Interest compounds over the life of the loan until a maturity event occurs.
When does the loan need to be paid back?
No monthly payments are due on a reverse mortgage while it is outstanding. Borrowers are responsible for payment of taxes and insurance. The loan is repaid when the borrowers cease to occupy their home as a principal residence, whether they (the last remaining spouse, in cases of couples) pass away, sell the home, fail to pay taxes and insurance or permanently move out. Since the reverse mortgage is a non-recourse loan, the amount owed can never exceed the market value of the home. Furthermore, if the home is sold and the sales proceeds exceed the amount owed on the reverse mortgage, the excess money goes to the borrower or their estate.
What if I have an existing loan?
You may qualify for a reverse mortgage even if you still owe money on an existing mortgage. However, the reverse mortgage must be in a first lien position, so any existing indebtedness must be paid off. You can pay off the existing mortgage with a reverse mortgage, money from your savings, or assistance from a family member or friend.
If you find yourself in a deficit situation where there’s not enough money to pay off the existing mortgage, you may use funds from a grant or gift from a family member or friend to cover the gap, but you cannot incur a new debt obligation (i.e., loan).
What is the service set-aside?
Under the FHA HECM program, borrowers are charged a monthly servicing fee that ranges from $30-$35 to manage their account once the loan closes. The service fee set-aside is an estimate of what the total servicing fees will be over the life of the loan. We currently do not charge a service fee.
Although it’s not considered a closing cost, the service fee set-aside can equal several thousand dollars, which is deducted from the available loan proceeds. You do not have access to that money, nor does it earn interest.
How does government assistance work with a reverse mortgage?
A reverse mortgage may affect regular Social Security or Medicare benefits. If you are on Medicaid, any reverse mortgage proceeds that you receive must be used immediately. Funds that are retained would count as an asset and could impact Medicaid eligibility. Please contact the appropriate Government agency for clarification on how a reverse mortgage may impact benefits.
Why do I need to get counseling?
Counseling is one of the most important consumer protections built into the program. It requires an independent third-party to make sure you understand the program, and reviews alternative options, before applying for a reverse mortgage.
By law, a counselor must review (i) options, other than a reverse mortgage, that are available to the prospective borrower, including housing, social services, health and financial alternatives; (ii) other home equity conversion options that are or may become available to the prospective borrower, such as property tax deferral programs; (iii) the financial implications of entering into a reverse mortgage; and, (iv) the tax consequences affecting the prospective borrower’s eligibility under state or federal programs and the impact on the estate or his or her heirs.
What are the requirements to get a reverse mortgage?
Borrowers need to be at least 62 and have enough equity in their home to get a reverse mortgage. There are currently no special income or medical requirements, however HUD is expected to release a financial assessment soon.
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.
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. A review of the trust documents would be conducted by the reverse mortgage lender to determine if anything in the living trust would be unacceptable.
How does a purchase reverse mortgage work?
Beginning January 1, 2009, borrowers are now able to purchase a new property with a reverse mortgage. Check out our purchase reverse mortgage page for all the information on how the program works, including eligible property types, property flipping, and to view purchase examples.
What is the process to get a reverse mortgage?
Can I refinance a reverse mortgage?