Common Questions on Reverse Mortgages
A reverse mortgage is a type of home loan in which the lender pays you by taking a part of the equity in your home and converting it into payments for you. Typically, this type of loan is aimed towards older homeowners who need an advancement on their home equity.
The loan requires no monthly mortgage payments and is tax-free. As long as the homeowner remains in living in their home, then they will not have to pay back the money right away. Reverse mortgages do not typically affect your social security or Medicare benefits.
How Does a Reverse Mortgage Work?
Reverse mortgages usually require a financial assessment when applying for the loan and this assessment will estimate the amount of money you will receive. Sometimes the lender may require a “set-aside” amount, which will be used to pay for your taxes and insurance during the loan time period.
Most reverse mortgages will have a clause called “non-recourse,” which will ensure that the homeowner or estate will not owe more than the appraised value of their home (when it is time to repay the loan or the house is sold). Basically, the older homeowners have more home equity and less money owed on their home, which will gain them more money from the loan.
Paying for Senior Care
Sometimes seniors find themselves in a situation where they do not have enough income or savings to pay for personal care or home care. Perhaps a senior does have the means to pay for long-term care insurance, but their financial resources are in their home ownership. For some seniors, a reverse mortgage is a viable option for seniors that do no require immediate care.
Types of Reverse Mortgages
Single Purpose Reverse Mortgage
This type is the least expensive, but can only be used for one solitary purpose that the lender will specify. A lender could tell the homeowner that they cannot use the money to pay for property taxes and maintenance, but instead use it for medical bills; the lender can dictate how the homeowner uses the money. Single-purpose reverse mortgages are not available everywhere but are offered by some state and local government agencies and nonprofit companies.
Proprietary Reverse Mortgages
This is a private loan, which is supported by the companies that develop the loans. Usually, if you owe higher-valued home you could receive a bigger lump of money. In other words, if your home has a higher appraisal and you have a smaller mortgage you could receive more money.
Federally Insured Reverse Mortgages or Home Equity Conversion Mortgages (HECMs)
These reverse mortgage loans are supported by the U.S. Department of Housing and Urban Development (HUD) and can be used for any purpose. You must meet with a counselor from an independent government-approved housing agency. The counselor will provide the homeowner with costs, financial implications, alternatives, payment options, and other information about reverse mortgages.
HECM and proprietary mortgages are more expensive and have higher upfront costs. The amount of money you can borrow from HECM and proprietary mortgages depend on your age, the type of reverse mortgage, the value of your home, interest rates, the financial assessment, and the ability to pay property taxes and insurance.
Other Costs and Fees
There are fees and additional costs that you should consider when applying or thinking about applying for a reverse mortgage. The homeowner must pay the property taxes, insurance, utilities, fuel, maintenance, and any other expenses. The lender will make you pay back the loan if you do not pay for these other expenses (especially the property taxes, insurance, and maintaining the home).
Some reverse mortgages may require an origination fee, servicing costs, and other closing costs. Mortgage insurance premiums (usually for HECM) may be charged as well. Homeowners should also keep in mind that they will owe more over time as the interest builds up to their balance and the interest rates are subject to change. Most reverse mortgages have variable interest rates, which are tied to the changes in the market and the financial index. The variable interest rates give more options on how to receive your money and you can possibly receive more money with these interest rates.
Some reverse mortgages will have fixed interest rates with the requirement of taking your loan money as a huge lump sum and usually, the amount you can borrow is less than the variable interest rates. Also, interest rates are not tax-deductible.
Common Questions about Reverse Mortgages
1. What happens to your spouse if you pass away?
For the HECM, if your spouse did not sign the loan papers, it is possible for them to remain living in the home after their spouse who signed the papers has passed away. The remaining spouse will not receive further money from the HECM mortgage but can remain in the home as long as the spouse pays the property taxes, insurance, and maintains the property.
2. What is a maturity event?
A maturity event is when the repayment of the loan is due. This occurs when:
- The borrower sells their home
- The borrower passes away
- The borrower’s home is no longer the primary residence
- The borrower does not maintain the property for a minimum of 12 months (possibly due to physical or mental illness)
- The borrower fails to pay property taxes and/or insurance
- The borrower fails or is unable to fix any necessary property damages
3. Can I pay off my loan before the maturity event?
Yes, you can pay off your loan anytime during the loan time frame.
4. Are there any special requirements?
Usually, the homeowner must be at least 60 years old, own a home, and have enough equity in their home. There are no medical requirements.
5. What if I already have a mortgage?
If you have an existing mortgage, you can still apply and receive a reverse mortgage, but you must pay off your debt first. You can pay off your preexisting mortgage with a reverse mortgage, your savings, or family assistance. You can pay off your debt with a reverse mortgage by qualifying for a higher amount.
For example, you own $130,000 for your existing mortgage and qualify for $180,000 from a reverse mortgage (based on your age, appraised home value, and interest rates). Then you can pay off your existing mortgage and still have $50,000 left to use for other purposes.
6. Can I cancel the loan deal after closing?
Yes, you have three business days after a loan deal closing to cancel without any penalty. This is known as the right of “rescission” and you must notify the lender in writing. Make sure to have a copy of the letter and record when it was sent. The lender has twenty days to return the money you paid for the financing.
7. How will I receive my payments?
There are multiple ways to receive your payments:
- Tenure: equal monthly payments
- Term: equal monthly payments for a fixed period of selected months
- Line of Credit: unscheduled payments or in installments, at certain times and in an amount of your selection until the credit line is spent
- Modified Tenure: a mix of line of credit and scheduled monthly payments for the whole time you remain in your home
- Modified Term: mix of line of credit plus monthly payments for a fixed time period of selected months
8. Is there anything left for my heirs?
Typically, reverse mortgages use of the home equity, which means very few assets are left for the homeowners or heirs. If there is anything left it will go to the heirs, but it depends on numerous factors such as interest rates, appraisal value of the home, and the type of reverse mortgage.
9. What if I want to keep my home, or keep the home of my family?
HECM reverse mortgages offer the homeowners or heirs the option of paying off the loan and keeping the home instead of selling and they would not have to pay more than the appraised value of the home.