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Reverse Mortgage

Reverse Mortgage

What is a Reverse Mortgage? It’s a type of loan that allows homeowners to borrow against their home’s equity as tax-free income. With this type of mortgage, instead of the homeowner making payments to the lender, the lender makes payments to the borrower. This becomes an attractive alternative to seniors who very likely have their net worth tied up in their home equity.  

What are the qualifications for a Reverse Mortgage?  You must be at least 62 years and either own your home free and clear or have a considerable amount of equity (at least 50%).  There are several fees associated with the initiation of this mortgage that are the homeowner’s responsibility including:

  • an origination fee
  • up-front mortgage insurance premium
  • loan servicing fees
  • Interest

In addition, all prospective reverse mortgage borrowers are required to complete a HUD counseling session to primarily outline the pros and cons of this type of mortgage. You must also remain current on property taxes and homeowners insurance and maintain the home to a reasonable level of repair. If you stop living in the home for longer than a year, you will be required to repay the loan. 

What are the different types of Reverse Mortgages?  There are primarily 3 types of reverse mortgages as outlined below. 

Single Purpose Reverse Mortgage

This type of reverse mortgage requires that the homeowner use the payments for a specific purpose that the lender approves. For example, the lender will want the funds to go towards the maintenance of the home, towards home insurance premiums/property taxes or cover other payments that are in the lender’s interest. While this type of reverse mortgage usually comes with lower interest rates, they are hard to come by as not many lenders offer them.

Home Equity Conversion Mortgage (HECM)

This type of mortgage is insured by the Federal Housing Administration (FHA) and the borrowed amount is based on appraised value of the home and within the FHA limits. An additional set of requirements include:

  • Property must be a single-family home or a two to four unit home with one unit being occupied by the borrower
  • A HUD or FHA approved condominium
  • A manufactured home that meets the FHA requirements
  • Required HECM Counseling
  • Partake in a Financial Assessment

There are two types of HECMs: a fixed-rate and an adjustable-rate. Fixed-rate HECM has an interest rate that stays the same throughout the life of the loan and primarily gives the payment only once and in one lump sum. The adjustable-rate option, on the other hand, has a fluctuating interest rate throughout the life of the loan and offers the borrower the opportunity to take payments either as a lump sum, monthly payments, a line of credit or any combination of the three. You can use the funds for basically anything.

There are certain conditions that need to be met, however, to keep the lender from terminating and therefore calling in the loan. For example, if a borrower fails to keep the property in good repair or pay the property taxes or insurance, the loan balance will be due. If the property stops being the borrower’s primary residence for more than 12 consecutive months, the loan balance will be due. A borrower can even lose their home if they have been away from their home for more than 6 months for non-medical reasons. 

Proprietary Reverse Mortgage

These loans are usually offered through a private lender, and, unlike an HECM, they are not as tightly regulated and are not federally insured. They are sometimes referred to as jumbo reverse mortgages since they are sought by people who want access to more money than the federally insured reverse mortgages can supply and whose homes are valued above the government limits.  

Similar to an HECM, the borrower can take a lump sum, get monthly payments or set up a line of credit.  Unlike single purpose reverse mortgages, the funds aren’t restricted to a single purpose (e.g.; maintenance).  Unlike federal insured loans, this type of loan doesn’t require counseling to qualify, or monthly premiums, however, you’ll be paying a higher interest rate. This type of loan is also difficult to obtain as not many lenders want to offer this.

What are the Advantages to a Reverse Mortgage?

  1. You can stop paying your mortgage
    Regular loan payments cease once you take out a reverse mortgage
  2. It helps to secure retirement
    It supplements income for homeowners who don’t have enough in savings or investments.
  3. It lets you stay in your home
    Instead of selling your home for liquidity, this process will let you receive funds WHILE you are still living in your home.
  4. You get tax free income
    Funds received from the reverse mortgage wouldn’t be taxable as the IRS considers them to be “loan proceeds”.
  5. You can never owe more than your home is worth
    The debt amount that must be repaid can never exceed the property’s value.

What are the Disadvantages to a Reverse Mortgage?

  1. Interest rates are higher
    Interest rates on a reverse mortgage are typically higher than most types of other mortgages
  2. Additional fees could prove costly
    Reverse mortgages have additional costs including lender fees, FHA insurance charges and closing costs. These can however be added onto the loan balance. It will lead the borrower to obtaining more debt and less equity. On top of that, the homeowner will be paying service fees monthly, as high as $35 if the interest rate adjusts on a monthly basis.
  3. Your home can be foreclosed
    If the homeowners don’t pay property taxes or maintain homeowners insurance and even fail to pay HOA dues, the bank can commence foreclosure.
  4. Your retirement benefits could be impacted
    Reverse mortgages can impact the homeowners ability to qualify for other need-based government programs such as Medicaid or Supplemental Security Income (SSI).
  5. Your estate will be impacted
    Your estate will need to be settled within a specified time and there will be less money to leave your heirs.

Need more information?

Contact us for any assistance regarding Reverse Mortgages.

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