Today's Reverse Mortgage

A reverse mortgage is a unique loan which allows homeowners to convert part of the equity in their home into cash payments.  They are only available to those who are 62 and older and own their home outright, or have at least 50% equity in their home.  In this particular loan scenario, the lender will use various factors to determine the initial principal loan limit. Typically, the older you are, the more the property is worth, and the lower the interest rate, the higher the principal loan limit.  Once this amount is established, the homeowner can then choose to receive payments as a lump sum, fixed monthly payment, or line of credit from the lender.  With each payment, interest and fees are rolled into the loan balance.  Over time, the balance of the loan is actually increasing and equity is decreasing.

The loan balance and interest on a reverse mortgage becomes due and payable when one of four events occur.  If the homeowner sells the house.  If the house is no longer the homeowner’s primary residence, meaning if they vacate the property for more than 12 consecutive months due to mental or physical illness, pass away, or move out.  If the homeowner fails to pay homeowners insurance, property taxes, or if they let the property deteriorate beyond what is considered normal wear and tear, the lender might require the homeowner to repay the loan in full.

Reverse mortgages can be a good option for some seniors whose net worth is mostly tied up in their home, and need cash to pay for cost-of-living expenses late in life, often after they’ve run out of other savings or sources of income.  However, there are disadvantages to them as well, including consequences for spouses and heirs.  So, it’s important to understand how reverse mortgages work and what they mean for you and your family before deciding to get one. 

Types of Reverse Mortgages

1. Single Purpose Reverse Mortgages
      • Least expensive option
      • Provided by state & local governments and some non-profits
      • Received funds can only be used for certain purchases, such as home repairs/improvements or property taxes, but the specific use is dictated by the lender.
2. Proprietary Reverse Mortgages
      • Private loans backed by private companies
      • Can typically receive a larger loan advance, especially with a higher valued home
      • Be careful - they can attract unscrupulous professionals who use reverse mortgages as an opportunity to scam unsuspecting seniors out of their property’s equity.
3. Home Equity Conversion Mortgages (HECMs)
      • Most common reverse mortgage type and likely the one you’ll get
      • Federally insured & backed by the US Department of Housing & Urban Development (HUD)
      • Received funds can be used for any purpose
      • Can be more expensive than other loan options
      • Borrower can choose how they receive their funds
            1. Lump sum
            2. Fixed monthly payments
            3. A line of credit
            4. Combination of regular payments and line of credit
Since HECMs are the most popular reverse mortgage type, that is what I will be focusing on for the remainder of the outline.

HECM Eligibility Requirements

Borrower Requirements:
1. All borrowers must be 62 or older (including any co-owners listed on the home’s title)
2. Own the property outright or have at least 50% equity
      • Typically, if the borrower doesn’t own their house outright, they will need to use some of the funds received from the reverse mortgage to pay off their existing mortgage.
3. Occupy the property as your principal residence
      • Cannot vacate, leave, or move out of the property for more than 12 consecutive months
4. Cannot be delinquent on any federal debt
5. Must be able to continue to make payments for property charges such as:
      • Property Taxes
      • Home Insurance
      • HOA Fees
6. Participate in a consumer information session given by a HUD-approved HECM Counselor to go over the following:
      • Eligibility requirements
      • Financial implications
      • Alternatives to obtaining a HECM
      • Provisions of the mortgage becoming due and payable
      • Repaying the loan
      • How a HECM could affect Medicaid & Supplemental Social Security Income (SSI)
      • Cost for counseling is around $125 & it’s a 90 minute session

Property Requirements:
1. Single family home or 2-4 unit home with one unit occupied by the borrower
2. HUD-approved condominium project
3. Individual Condominium Units that meet FHA Single Unit Approved Requirements
4. Manufactured home that meets FHA requirements (built after June 1976)
5. The above eligible property types must meet all FHA property standards & flood requirements

Financial Requirements

With a HECM, there is generally no specific income or credit score requirement. However, lenders will conduct a financial assessment to assess the following:
      • Income, assets, monthly living expenses, and credit history
      • Timely payment of real estate taxes, hazard & flood insurance premiums
They’re evaluating your willingness and ability to meet your obligations and the mortgage requirements. Based on the results, the lender could require funds to be set aside from the loan proceeds to pay things like property taxes, homeowner’s insurance, and flood insurance (if applicable).

Requirements for How Much You Can Borrow

The amount of money you can get from a reverse mortgage depends upon a number of factors, such as:
      • Your Age
      • The Current Interest Rate
      • The lesser of the appraised value of your home or the FHA lending limit (which varies by county)
Homeowners are likely to receive a higher principal limit the older they are, the more the property is worth and the lower the interest rate.  Despite the reverse mortgage concept in practice, qualified homeowners are not likely to be able to borrow the entire value of their home even if the mortgage is paid off.  Part of the home equity must be used to pay the loan’s expenses, including mortgage premiums and interest.

How Can I Receive Payments from a Reverse Mortgage?

Payment options are tied to the interest rate option so:
1. Fixed Interest Rate:
      • Payment is received in a single lump sum only
2. An Adjustable Interest Rate:
      • Term Option - fixed monthly cash advances for a specific time.
      • Tenure Option – fixed monthly cash advances for as long as your live in your home
      • Line of Credit – unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted
      • A combination of monthly payments and a line of credit
Reverse mortgage proceeds are not taxable.  The IRS considers the money to be a loan advance, rather than income to the homeowner.

HECM Costs

The closing costs for a reverse mortgage aren’t cheap, but the majority of HECM mortgages allow homeowners to roll the costs into the loan so you don’t have to shell out the money upfront. Doing this, however, reduces the amount of funds available to you through the loan.
1. Mortgage Insurance Premiums – Federally backed reverse mortgages have a 2% upfront mortgage insurance premium and annual premiums of 0.5%.
2. Third Party Charges – These fees include appraisals, home inspection, credit checks, title search and title insurance, closing costs, and recording fees
3. Origination Fee – Typically range from 1% to 2% of the loan amount and is capped at $6,000.
4. Servicing Fee - Lenders can charge a monthly fee to maintain and monitor your HECM for the life of the loan.
      • Fixed rate - Cannot exceed $30
      • Adjustable rate – Cannot exceed $35
5. Interest
      • Fixed Rate – Can start under 3.5%, but you can only receive one lump sum payment with this option
      • Adjustable Rate – Interest rate varies based on the London Interbank Offered Rate (LIBOR), with a margin added for the lender.
This bears repeating: shop around and compare the costs of the loans available to you. While the mortgage insurance premium is usually the same from lender to lender, most loan costs – including origination fees, interest rates, closing costs, and servicing fees – vary among lenders.

When Does the Loan get Paid Back?

You do not have to repay a reverse mortgage until:
1. You sell the home
      • Can use the proceeds of the home sell to pay off the reverse mortgage
2. The home is no longer the homeowner’s primary residence. The home is no longer considered the primary if it has been vacated for more than 12 consecutive months. This could include:
      • Moving out (voluntarily or involuntarily) to a healthcare facility such as a hospital, rehabilitation center, assisted living facility or nursing home
      • Passing Away - Your heirs will be responsible for paying off the mortgage with other funds from your estate, their own funds, or proceeds from the sale of the home.
3. The homeowner fails to pay homeowners insurance or property taxes
      • In a reverse mortgage, you keep the title to your home. That means you are responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses.
4. The homeowner lets the property deteriorate beyond what is considered normal wear and tear

Pros of Reverse Mortgage

1. Can provide much-needed cash for seniors whose net worth is mostly tied up in the value of their home, which can be used:
      • To pay for out-of-pocket healthcare expenses
      • For supplementing retirement income
      • To cover the cost of needed home repairs
2. Allows the homeowner to keep title of the home and to continue to live in it
3. All loan costs can be rolled into the balance of the loan
4. Doesn’t require the homeowner to make loan payments to the lender as long as you live in the home
5. Interest rates are competitive with other types of mortgages

Cons of Reverse Mortgage

1. You’re spending a significant amount of the equity you’ve accumulated on interest & loan fees
2. You could potentially outlive the mortgage proceeds
3. Reverse mortgages become complicated if there is a spouse involved. Do your research to determine whether the spouse will be able to stay in the home, or if they will lose the home due to a forced sale to pay off the loan.
4. Your heirs may or may not be able to inherit your home. In order to keep the home, they will have to pay either the full loan balance or 95% of the appraised value - whichever is less.  If they lack these funds, they will likely have to sell the home.
5. Be aware of reverse mortgage scams

Links for additional information

US Department of Housing & Urban Development (HUD)
Consumer Financial Protection Bureau
Federal Trade Commission Consumer Information