A Look at The Reverse Mortgage
Looking for more retirement money? With home prices around the country soaring, now may be the ideal time to discuss a Reverse Mortgage with a Reverse Mortgage Specialist. This loan option can be a good way to supplement retirement income by accessing a portion of your home's equity.
If you are 621 years of age or older, you may be able to obtain funds to:
Renovate your home
Improve your monthly cash flow
Purchase a different home
Pay medical bills
Reduce or prevent the need to sell stocks during a market downturn
Pay for in-home care
Help finance long-term care for one spouse while the other remains in the home
Connect with our Reverse Mortgage Specialist, Karin Fischer, to discuss the options by visiting her website here.
Let’s take a look at what a Reverse Mortgage is and when it may make sense.
What is a Reverse Mortgage?
An FHA Reverse Mortgage, also known as a Home Equity Conversion Mortgage (HECM)2, is regulated by the U.S. Department of Housing and Urban Development (HUD) and insured by the Federal Housing Administration (FHA)3. This loan type can allow homeowners aged 62+ to take out some of their home equity to improve their monthly cash flow. The funds are not considered income and typically will not affect eligibility for entitlement programs such as Social Security4 or Medicare.
Unlike traditional home loans, a HECM doesn’t require making any payments to a lender. Instead, you hold onto the title and your lender uses the home as collateral to make loan payments to you. You can use that money for anything you need.
For example, if your retirement income needs are greater than your current income, utilizing your home equity may be an option you should consider. You can borrow part of your equity income tax-free5 to pay for medical bills, renovate your home, or enjoy a more comfortable retirement. As with any mortgage, you must meet your loan obligations, keeping current with property taxes, insurance and keeping your home in good condition. Failure to do so will place the loan in default and the lender may be able to foreclose under the terms of the loan.
Benefits of a Reverse Mortgage
A Reverse Mortgage can be used as part of your financial retirement plan. With newer loan options that reduce up-front costs, Reverse Mortgages have become more versatile in recent years. Many homeowners are now using a reverse mortgage strategically as part of a sound financial plan. A Reverse Mortgage line of credit can serve as a cash reserve that you can tap into as needed. And unlike a traditional Home Equity Line of Credit, the unused reverse mortgage credit line actually grows over time*. In fact, you can use this as a line of credit that increases, tax free5.
*If part of your loan is held in a line of credit upon which you may draw, then the unused portion of the line of credit will grow in size each month. The growth rate is equal to the sum of the interest rate plus the annual mortgage insurance premium rate being charged on your loan.
Monthly advances can also help you supplement other retirement income, so you can avoid withdrawing savings or liquidating invested assets. While you must continue to meet loan obligations such as taxes and insurance and keeping the home in good condition, no monthly principal and interest payments are required, which can improve your cash flow and help you live more comfortably.
A Reverse Mortgage allows you to pay off your existing mortgage using the loan proceeds, leaving you free from monthly mortgage payments. If there is no mortgage to pay off or it’s a small lien, you can use the remaining funds to pay for needed home repairs or upgrades, cover living expenses, or even keep the funds in a nest egg to give you peace of mind for any unplanned expenses that may come up. There are no restrictions on how you spend your proceeds.
How a Reverse Mortgage Works
As discussed earlier, you are not required to make payments to a lender as long as you live in the home. Your loan balance will grow over time and the equity in the home decreases as you borrow more money. Any interest due is simply rolled into your loan balance.
Repayment of the reverse mortgage is usually handled through the sale of the home by the homeowner, the estate (or heirs), or the lender. The loan must be repaid when you move out, pass away, or sell the property. However, you will never owe more than the home is worth when the loan is repaid because the federal mortgage insurance on Reverse Mortgage loan products protects you and pays the lender the difference. This coverage also protects you if you go to sell your home if the sales price equals or exceeds the appraised fair market value. And if the loan balance is less than the market value of the home, the additional equity is retained by the homeowner/heirs if the home is sold.
The lender can only foreclose on the home if you fail to meet the obligations stipulated, such as keeping the home in good repair and paying your property taxes and homeowner’s insurance premiums. See below for all homeowner obligations to avoid foreclosure.
You are not obligated to make monthly mortgage payments. As with any mortgage, you must meet your loan obligations, keeping current with property taxes, insurance and keeping your home in good condition.
You still own your home as long as it is your primary residence, you maintain it, and pay any property taxes and insurance2.
You, or your estate/heirs, can never owe more than the home is worth when the loan is repaid (non-recourse loan).
The balance of the loan increases, therefore the home is losing equity over time. But remember, the home may also be growing in value.
Reverse Mortgage Funds
The amount you may qualify for depends on your home’s appraised value, your age, and prevailing rates. Typically, the loan amount will range between 40% - 60% of the value of your home. The older the borrower, the higher the loan amount. Your Reverse Mortgage Specialist will need your exact birthday and the estimated value of your home to determine an approximate loan amount.
Funds from a HECM may be received in various ways*:
Taking a lump sum payment.
Having a line of credit to draw from.
Choosing fixed monthly payments for a certain term.
Getting a fixed monthly payment for life.
Choosing a combination of options.
*Borrowers who elect a fixed rate loan will receive a single disbursement lump sum payment. Other payment options are available only for adjustable-rate mortgages.
Other Reverse Mortgage Considerations
It’s important to speak to a Reverse Mortgage Specialist about the pros and cons of a Reverse Mortgage for your specific situation. You are also required to receive Reverse Mortgage counseling from a third-party counselor before the application can be submitted to the lender. As with most financial products, there are a number of factors to consider before deciding what’s best for you.
You’ll want to talk this through with family and your advisor to decide if you are comfortable with using your home as collateral. If you had intended to leave your home to someone, a Reverse Mortgage may not be the right option. However, it may be necessary to weigh the benefits of a reverse mortgage and financial empowerment against potentially leaving a larger inheritance in your will. At Certainty, we understand that these are very personal decisions and require a lot of consideration. That’s why we will be here every step of the way to help you with your decision by providing the facts (and not a sales pitch).
And keep in mind that you can also use a Reverse Mortgage to purchase your next home. For example, if you are living in a 2-story home without universal design, you may want to upgrade to a newer home that allows you to age in place comfortably. Your purchasing power could be almost twice the selling price of your current home, depending on your age and any existing liens.
What Other Options Are There?
Many lenders have their own proprietary Reverse Loan products that carry all the same safety features. The fees on these products are a lot less and can even be zero, however, you do not have access to a growing Equity Line. These products may also yield higher loan amounts, but rates may be higher than an FHA HECM Loan3 since they do not carry a higher up-front Mortgage Insurance that the FHA option requires. Still, no monthly mortgage payments are made!
* But at the higher rates, it will eat up the equity faster. And, we have products available for borrowers starting at age 60 instead of 62.
* As with any mortgage, you must meet your loan obligations, keeping current with property taxes, insurance and keeping your home in good condition.
And of course, you can always try the traditional route – Conventional 30-year loans, 2nd liens, or traditional lines of credits. However, there will always be a monthly payment. Speak to your Loan Officer to learn more.
What Actions Can trigger a Foreclosure
Although the borrower is not obligated to make monthly principal and interest payments, they still do have certain housing obligations and they are not so different from borrowers with traditional loans. Follow these rules to stay clear of any foreclosure proceedings:
The home must be your primary residence and you must reside in the home the majority of the time. It’s ok to have a 2nd home elsewhere.
As with any mortgage, you must meet your loan obligations, keeping current with property taxes, insurance and keeping your home in good condition.
You can never add anyone to title. If you want to put a trust on title, you can do so, but you must talk with the lender first
You can never rent out your home, short- or long-term.
If you own a multi-unit home like a duplex or 4-plex, you must live in one of the units. You can rent out the other units.
You can have boarders in your home and charge them room rent.
You can never add a 2nd lien or traditional line of credit, but you can always refinance the existing reverse loan.
If you live away from your home for 12 months or more, the lender will start foreclosure procedure. So, if you think you will be in long term care or assisted living for the remainder of your life, sell the home.
You cannot let your home go in disrepair!
When you pass, your heirs must contact the lender as quickly as possible.
How Do I Qualify for a Reverse Mortgage?
It’s actually fairly easy to qualify for a HECM. Speak with your Reverse Mortgage Specialist for specifics, but some general guidelines include:
You must be at least 62 for the HECM FHA mortgage. For the proprietary products, the age can be even lower. Speak to your Reverse Mortgage Specialist to learn more.
If married, only one of the two needs to be 62.
Credit scores are not considered3; however, your credit report cannot reflect a pattern of late payments in the previous 24 months and all HOA, insurance premiums and real estate taxes must also have been paid on time in the past 24 months. But with enough equity in your home, there may be options available to you to overcome this.
The home must meet qualifications. All mechanicals must be in working order. Any unsafe conditions or essential repairs would need to be done prior to closing.
What Does All This Cost and What Are My Out-of-Pocket Expenses?
The FHA HECM can be an expensive loan. It is not recommended if you intend to sell the home anytime soon. If you keep the home for the remainder of your life, then those fees spread out over the course of 15-20 years and may make it worthwhile, and your APR will be lower. But if you sell your home in 2 years, then those fees will reflect a very high APR. Typical fees include the following:
Typical closing costs like title, appraisal, credit report. In some cases, there may be an origination fee, especially if no disbursement is taken at closing. In most cases, closing fees are lower on a Reverse Mortgage.
The appraisal fee is paid out of pocket and is not ordered until we know you will be approved for the loan.
Your counselor will charge a fee which will need to be paid out of pocket.
The most expensive part is typically the Up-Front FHA Mortgage Insurance, which is 2% of the value of the home. For example, if your home is worth $400,000 the fee would be $8,000. This is the insurance that protects the homeowner.
Origination fees, which are paid based on the loan amount and disbursed at closing.
The Rights of Heirs
Most concerns about Reverse Mortgage Loans come from the heirs of the borrowers and not necessarily the borrowers themselves. It is highly recommended that the borrower includes family in their decision to obtain a Reverse Mortgage and maybe even bring that family member to the interview process so that they can ask questions. If there are no heirs, the borrower may want to notify their advisor or estate planner that they have a Reverse Mortgage on the home. It is suggested to provide that representative with access to a copy of the mortgage statement, or at least the Lender (or Servicer) name, contact information, and loan number.
The Estate has 90 days to decide on what they want to do with the home, but it is recommended to do this as quickly as possible (within a week or two if possible). There are a lot of moving parts that need to be considered. Prior to calling the Lender, the Estate should have an idea of the value of the home because that will determine the best route to take.
The Estate / Heir(s) can refinance the home if they qualify, buy the home (if more than one heir is involved), sell the home themselves, or let the Lender sell it. Allowing the Lender to sell the home may be ideal if there is little to no equity so the Estate avoids paying for any potential Realtor fees.
If the decision is to sell the home, the Lender will allow the Estate 6 months for the sale. If not sold in 6 months, they may provide another 6-month extension. Keep in mind that the loan balance grows each month because there are no payments being made 6.
Reverse Mortgages can give you options in your retirement. Rising home values across the country have led many to tap into their home’s equity and may be an option worth exploring.
If you’re ready to schedule time to review a Reverse Mortgage, contact Karin Fisher. You can find her website by clicking here.
1 Age requirements vary by specific proprietary products and state allowances.
2 This material has not been reviewed, approved, or issued by HUD, FHA or any government agency. Certainty Home Lending is not affiliated with or acting on behalf of or at the direction of HUD, FHA, or any other government agency. To find a Reverse Mortgage counselor near you, search the HECM Counselor Roster at https://entp.hud.gov/idapp/html/hecm_agency_look.cfm or call (800) 569-4287.
3 Certainty Home Lending is an FHA Approved Lending Institution and is not acting on behalf of or at the direction of HUD/FHA or the Federal government.
4 Consult a financial professional. Visit www.ssa.gov
5 Certainty Home Lending does not offer credit repair services.
6 Certainty Home Lending does not provide tax advice. The consumer should always consult a tax advisor for information regarding the deductibility of interest and other charges in their particular situation.