Reverse Mortgage Loan Information FAQ

Reverse Mortgage Pros And Cons

What is a reverse mortgage? A reverse mortgage, or a Home Equity Conversion Mortgage (HECM) represents a home loan with very specific restrictions in which a senior homeowner borrows money using a portion of the home's equity as collateral. The homeowner–borrower/s can receive the funds from the loan as a lump sum, a monthly payment, or as a line of credit. The reverse mortgage typically does not come due until the homeowner–borrower sells the home, moves out of it, or dies. What are the restrictions associated with a reverse mortgage? In general, the homeowner must be at least 62 years old, and own the home outright or owe a small mortgage balance. If the title to the home vests in two names, the youngest person on the title must be at least 62 years old. The home in question must be the principal residence of the borrowers, and must be a single–family home; a qualified condominium, townhouse, or manufactured home; or a one– to four–family, owner–occupied property. The homeowner–borrower/s must not be delinquent on any federal taxes, and must continue to pay taxes on the home, keep it insured, and maintain it.

What costs come with taking out a reverse mortgage?

Reverse mortgages involve significant costs, such as loan origination fees, closing costs, and mortgage insurance premiums. HECMs also involve considerable ongoing costs, such as interest and servicing fees, as well. Seniors considering a reverse mortgage should understand how much these costs would cut into the value of the loan.

How much will these reverse mortgage costs come to?

The origination fee can vary between $2,500 and $6,000, with the higher fees coming with properties that are more valuable.

The closing costs include an appraisal ($300 to $500), title search and insurance, surveys (also $300 to $500), inspections, recording fees, mortgage taxes, and other fees.

The mortgage insurance premium (MIP) due at closing is either 2 percent for Standard HECMs or 0.01 percent for Saver HECM loans, with the percent taken from the lesser of the appraised value of the home, the FHA HECM mortgage limit for the borrower's area, or the sale price. The Saver Loan, however, has a higher interest rate, and you may not borrow as much with it as you may with the Standard Loan. For the duration of the loan, the borrower must pay an annual MIP of 1.25 percent of the mortgage balance. Paying these premiums guarantees that the borrower will receive the expected loan advances. The insurance also guarantees that the total repayable value of the loan can never be more than the home's value.

Monthly servicing fees can range from as much as $30 if the loan's interest rate adjusts annually, to as much as $35 if the interest rate adjusts monthly. At loan origination, HECM lenders set aside the servicing fee, deducting it from the available funds, and each month they add the monthly fee to the loan balance.

My home is still mortgaged. Does this disqualify me for a reverse mortgage?

Not necessarily. If you can pay the balance of your mortgage with savings, or proceeds from a reverse mortgage loan, you may qualify for a reverse mortgage. You just need enough equity in the home for the reverse mortgage transaction to make sense.

How does a reverse mortgage benefit the homeowner–borrower/s?

The homeowner–borrower/s who derives most benefit from a reverse mortgage includes those with few assets other than the equity in their home. It enables such persons to use their home equity for such things as living expenses, home repairs, or health care needs that they otherwise would not afford. If, at the time for repaying the loan, the loan amount exceeds the value of the home, the lender takes the loss.

Can I use a reverse mortgage to pay off other debts?

While you may use the proceeds from a reverse mortgage for just about any reason you choose, it may not be the smartest solution for your debt. You might be able to get debt relief for unsecured debt, like credit card debt, by settling at a discount. In some states, even those with enough equity in their home to think about a reverse mortgage, might remain eligible to file a chapter 7 bankruptcy or a chapter 13 bankruptcy and still retain their home. In general, you should examine other ways to eliminate your debt. Remember that a reverse mortgage loan with all its rules and complications still stands as a type of home equity loan and as such carries the dangers of a home equity loan when used to pay unsecured debt.

What are the best reasons for taking out a reverse mortgage?

The best reasons for taking out a reverse mortgage include providing a homeowner with cash needed for living expenses, home repairs, or health care needs when the homeowner does not have other options to manage those crucial costs. Many people find themselves at retirement age without adequate retirement savings, reverse mortgage loans may fill the void.

What are some poor reasons for taking out a reverse mortgage?

While no laws restrict what a borrower may use funds from the loan for, poor reasons for taking out a reverse mortgage include investments, nonessential expenses such as travel, and near–term needs. If you need a loan that you could repay in five years or less, you are probably better off with something other than a reverse mortgage. Unscrupulous lenders have encouraged some seniors to take out reverse mortgages and then use the proceeds to invest in annuities offered by the lender. Seniors should be aware that such encouragements are not in the homeowners' best interest.

Using assets you already have, such as saving accounts, CDs, and investment income, is wiser than borrowing money.

Can you explain why using a reverse mortgage for short–term needs might not be the best way to finance those needs?

Imagine a person with various assets and savings. Suppose this person took a reverse mortgage loan and used the money for short–term purchases such as a new TV, computer, and a vacation. In five to ten years, those goods may be obsolete and the trip a pleasant memory, yet the borrower must continue to pay interest on those expenditures for the rest of his or her life, or until the reverse mortgage loan is paid off. Those who can pay for short–term needs in another way should do so. This, once again, reinforces the concept that a reverse mortgage best suits those who need money and who have few if any other financial choices.

Are some homes worse candidates for reverse mortgage loans?

The lower the value of your home, the more expensive a reverse mortgage becomes. Although reverse mortgages on lower–value homes are less expensive than those on higher–value homes, their costs are still substantial. Reverse mortgages are generally a better deal for owners of houses worth near the maximum appraised value, which as of this writing is $625,000.

Remember that the essential transaction of a reverse mortgage is the conversion of a senior's equity in his or her home into cash. There are other ways of doing this, and most other ways are less costly.

Are there things I could do that would improve the chances of having a reverse mortgage work out well for me?

Put your and your spouse's name on the title of your home. If the title remains in your name only, and you die before your spouse, your home would have to be sold and the reverse mortgage repaid after your death. Your spouse could remain in the home, however, if she or he had the assets necessary to repay the reverse mortgage. Otherwise, she or he would face the possibility of eviction.

What are other ways of converting the equity I have in my home into cash?

Selling your home, and then buying a smaller home, could provide you with more cash than a reverse mortgage, and moving into a smaller home need not mean a diminished standard of living.

Banks and other lenders offer a variety of loans that use one's home equity as collateral. Most of these options are less costly than a reverse mortgage.

What are the most significant drawbacks of reverse mortgages?

Most reverse mortgages come with significantly higher closing costs, fees, and interest rates than other types of loans. Another drawback–although not necessarily true of all reverse mortgages–is that unscrupulous lenders have aggressively marketed them to people for whom they are not a beneficial financial option. For homes with significant equity at the conclusion of the reverse mortgage, the arrangement grants significant equity to the bank instead of the senior's heirs.

When does the lender recover the loan balance and interest?

The lender recovers the money borrowed and interest at the time the homeowner or the homeowner's heirs sell the house. If the amount borrowed exceeds the value of the home, the lender takes the loss. If the value of the home exceeds the amount borrowed, the lender and the estate split the difference.

Is there a best age at which to take out a reverse mortgage?

While the minimum age to qualify for a reverse mortgage is 62, financial advisors generally agree that the longer one can avoid taking out a reverse mortgage, the better. Getting income from one's home equity may be attractive, but doing so sooner can reduce one's assets for necessities later. The calculations used to issue a reverse mortgage loan mean that the longer a senior waits to apply for a reverse mortgage loan the larger the loan they may end up with.

How does my income, employment status, or credit score affect my eligibility for a reverse mortgage?

Eligibility for a reverse mortgage does not depend on income, employment, or credit score, so you do not need to worry about repairing a bad credit report.

What if I get divorced after taking out a reverse mortgage?

The liability of a reverse mortgage lies with the person or persons whose name/s appear on the home's title. If the names of both spouses appear on the title and they divorce, several scenarios could play out, depending on how the court settles the divorce. Some have found that taking out a reverse mortgage as part of a divorce worked to both parties' advantage as it provides cash for a settlement to one or both parties.

What if I want to make significant improvements to my home after I take out a reverse mortgage?

Home improvements such as an addition will not invalidate a reverse mortgage. In fact, you can use funds from a reverse mortgage for home improvements. Just remember that any equity achieved from home improvement expenditures may never benefit you or your heirs financially. While you might enjoy a new kitchen or additional room while living in the home, the lender will receive at least one–half of the equity gained from the improvement. In situations where the reverse mortgage loan exceeds the home value, you or your estate would see no return at all on the home–improvement investment.

How do I apply for a reverse mortgage loan?

As you would for an ordinary mortgage, you apply for a reverse mortgage from a traditional lender at a local bank or you may apply for a reverse mortgage online. Part of the process for obtaining a reverse mortgage is meeting with a reverse mortgage counselor, who is qualified to answer any question you may have regarding the loan. Meeting with the counselor entails paying a fee of about $125, which the loan can finance.

If I took out a reverse mortgage, would I still own my home?

Yes. The title to your home will remain in your name. When your home sells after you have moved out or died, and if the value of your home was more than the amount that the loan incurred, you or your heirs will repay the amount borrowed, the interest on that amount, and any fees associated with the loan to the lending institution. If the value of your home at the time of sale is less than the amount that the loan incurred, the lending institution takes the loss.

If I took out a reverse mortgage loan and then sold my home, who is responsible for the taxes associated with the sale?

As you retain title to the property, you or your heirs will be responsible for the taxes such as capital gains and estate taxes when the home is eventually sold.

How much money could I obtain through a reverse mortgage?

The amount of money a homeowner–borrower could realize from a reverse mortgage loan depends on where the home is located, the age of the (youngest) borrower, the value of the home, the current interest rate, and whether the borrower is taking the money as a lump sum, credit line, or monthly payment. The AARP provides a calculator that estimates how much a borrower could receive potential reverse mortgage loans.

Can a reverse mortgage help me avoid foreclosure?

Seniors with considerable equity in their homes, even when needing to stop foreclosure, remain eligible for a reverse mortgage. Many, especially older seniors living in relatively high–value homes, have found the reverse mortgage option to be their best choice for avoiding foreclosure and remaining in their homes. Before taking a reverse mortgage because you missed a few mortgage payments you should examine other ways to halt foreclosure, but it's nice to know a reverse mortgage can indeed save your home.

How long does the reverse mortgage process take?

Most reverse mortgages, from application to closing, take between 60 and 90 days.

Can I shop for a reverse mortgage on line, or must I go to a local lender?

For a government–backed (FHA) reverse mortgage, the HECM, you need to go to a local lender. Part of the HECM process is meeting with a mortgage counselor, whose job it is to make sure that you understand all the elements of the reverse mortgage. You can, however, get a reverse mortgage through other lenders who back their own loans, which the FHA does not insure. The easiest way to find out about these so–called "proprietary" reverse mortgages is to search for them on line. Typically, one web site will allow you to access many such lenders. One proprietary reverse mortgage or another may sound like better deal than the standard HECM, but without help from a qualified financial counselor, it may be difficult for a homeowner to determine whether it really is.

What if one of my children, or a friend, moves in with me after I have a reverse mortgage?

The provisions of the reverse mortgage apply regardless of who remains living in the house after the death or permanent departure of the last surviving homeowner–borrower. At that point, the house goes up for sale and the proceeds go to the bank and the homeowner's heirs. Any remaining occupants must move.

What if my heirs want to keep the house after I move or pass away?

It may be possible for your heirs to refinance the house and gain ownership when a reverse mortgage becomes due.

What happens to my furniture and other contents of the house after I move or pass away?

A reverse mortgage applies to only the house, not its contents. Your heirs will be able to dispose of these items as they would regardless of the reverse mortgage loan.

Must I live in the house all the time after I get a reverse mortgage?

The HECM allows homeowner–borrowers to live elsewhere for up to 365 consecutive days. This is in view of the eventuality that a senior would need care in an assisted living residence for illness or injury.

So, what is the bottom line on reverse mortgage loans?

For older seniors with valuable homes and few other assets or serious health issues, a reverse mortgage offers a good way to finance remaining in their homes for the final years of their lives. With fewer years left to live, the chances of their options or external circumstances changing are less than they are for their younger peers. Taking a reverse mortgage on a valuable home can provide a significant amount of cash for living necessities, property taxes, and home maintenance. Seniors with serious, chronic health conditions that could possibly require years in an assisted–living facility would probably do better by selling their home, rather than incurring the expense that accompanies a reverse mortgage. Reverse mortgage loans may provide the perfect solution for some seniors while for others better options exist. Do the research based on your own personal circumstances to see if a reverse mortgage loan will serve you best. After reading everything in this FAQ you should already be on the right track to a smart decision.