What is a Reverse Mortgage?
A Reverse Mortgage is a special type of loan exclusively for seniors 62 and older. A Reverse Mortgage allows you to convert the equity in your home into cash providing financial security to fully enjoy your retirement years. Instead of making monthly payments to a lender, a lender lets you access some of the equity in your home through either a lump sum payment, monthly payments or through a line of credit – whichever you prefer. While a reverse mortgage loan is outstanding, you continue to own the home and hold title to it.
Borrower Requirements and Responsibilities:
Age qualification: All borrowers listed on title must be 62 years old. A husband or wife with a spouse younger than 62 may obtain a reverse mortgage, but the name of the younger spouse must must come off the title.
Primary lien: A reverse mortgage must be the primary lien on a home. Any prior mortgage must be paid to acquire the reverse mortgage. (Reverse mortgage proceeds can be used,)
Occupancy requirements: The property used as collateral for the reverse mortgage must be your primary residence.
Taxes and Insurance: You are required to remain current on your real estate taxes, home insurance, and, if applicable, condo fees or you are susceptible to default.
Property Condition: You are responsible for completing mandatory repairs and maintaining the condition of your property.
Conveyance of the mortgaged property by will or operation of law to the estate or heir after mortgagor’s death: When a HECM loan becomes due and payable as a result of a mortgagor’s death and the property is conveyed by will or operation of law to the mortgagor’s estate or heirs (including a surviving spouse who is not on title and therefore not obligated on the HECM note) that party (or parties if multiple heirs) may satisfy the HECM debt by paying the lesser of mortgage balance or 95% of the current appraised value of the property
Features of Reverse Mortgages:
With a reverse mortgage, you always retain title to or ownership of your home. The lender never, at any point, owns the home even after the last surviving spouse permanently vacates the property.
A number of funds you receive depends on the age of the youngest borrower, the value of the home, the interest rate and upfront costs. The older you are, the more proceeds you can receive.
The funds can be delivered to you as a lump sum, as a line of credit or as fixed monthly payments, either for a fixed amount of time or for as long as you remain in the home. You can also combine these options, for example, taking part of the proceeds as a lump sum and leaving the balance in a line of credit.
Fees can be paid out of the loan proceeds. This means you incur very little out-of-pocket expense to get a reverse mortgage. Your only out-of-pocket expense is the appraisal fee and maybe a charge for counseling depending on the counseling organization you work with. Together, these two fees will total a few hundred dollars. Very low-income homeowners are exempted from being charged for counseling.
Your final loan balance is comprised of the amount borrowed, plus annual mortgage insurance premiums, servicing fees and interest. The loan balance grows as you live in the home. In other words, when you sell or leave the house, you owe more than you originally borrowed. Look at it this way: A traditional mortgage is a balloon full of air that loses some air and gets smaller each time you make a payment. A reverse mortgage is an empty balloon that grows larger as time passes.
With a Home Equity Conversion Mortgage or HECM (see Tyes of Reverse Mortgages), the government insured reverse mortgage option, no matter how large the loan balance, you never have to pay more than the appraised value of the home or the sale price. This feature is referred to as non-recourse. If the loan balance exceeds the appraised value of the home, then the federal government absorbs that loss. The government pays for it with proceeds from its insurance fund, which you as a borrower pay into on a monthly basis.
Types of Reverse Mortgages:
What is an HECM
HECM is the commonly used acronym for a Home Equity Conversion Mortgage, which is a reverse mortgage created by and regulated by the U.S. Government Department of Housing and Urban Development.
A HECM is not a government loan. It is a loan issued by a private bank, but insured by the Federal Housing Administration, which is part of HUD. Each year the borrower is charged an insurance fee of 1.25% of the loan balance. Your loan balance thus increases by the amount of this fee. The insurance purchased by this fee protects the borrower (1) if and when the lender is not able to make a payment; and (2) if the value of the home upon selling is not enough to cover the loan balance. In the latter case, the government insurance fund would pay off the remaining balance.
Currently, HECMs make up 99% of the reverse mortgages offered in America. HECMs come with rules and regulations that include a requirement that the borrower receive third-party counseling
The term “HECM Standard” refers to a traditional Home Equity Conversion Mortgage, which has been available since 1989. There are currently more than 500,000 issued HECMs in the market. The amount of money you receive is based on a table created by HUD and based on your age, the appraised current value of your home and interest rates. Fees can include an origination fee, an upfront mortgage insurance premium (MIP), a servicing set aside and traditional closing costs. Beginning April 1, 2013, this product option is only available with an adjustable interest rate. (For fees go to, What will a reverse mortgage cost me?). This product is desirable for senior homeowners who need the most money available to them.
HECM Saver is a lower-cost version of HECM Standard. The saving comes from a lower upfront mortgage insurance premium (MIP). The M.I.P. collected by the Federal Housing Administration on a HECM Saver is equal to 0.01, rather than 2% on a HECM Standard. On a $250,000 home, for example, you pay $25 in MIP under the Saver option, instead of $5,000 for a HECM Standard. The trade-off is that you receive 10-18% less money.
This product is desirable for people who don’t need as much money compared to HECM Standard, or don’t want to pay the higher fees. Because the fees are lower, and no monthly payment is required, it may also prove to be a better option than obtaining a home equity line of credit.
While the typical retiree uses a HECM to eliminate debts, pay for healthcare and/or cover daily living expenses, a growing segment of the senior population is using it to purchase a home that better suits their needs.
The advantage of using HECM for Purchase is that the new home is purchased outright, using funds from the sale of the old home, private savings, gift money and other sources of income, which are then combined with the reverse mortgage proceeds. This home buying process leaves you with no monthly mortgage payments.
While study after study reveals that an overwhelming percentage of seniors want to continue living in their current home for as long as possible, for some people that isn’t the best, or safest, option. HECM for Purchase offers a solution to downsize into a place that’s more easily navigable, possibly more energy efficient, with lower maintenance costs, or which is closer to friends and family.
As with any financial transaction– be it a mortgage, a credit card or even a bank account– there are specific rules and obligations attached to reverse mortgages. Some of them are unique to this particular financial product. You may be accustomed to such items being buried in fine print. With reverse mortgages, both loan officers and counselors will explain these specifics to you as part of the loan process.
Among the rules and obligations you need to be aware of are:
- Everyone listed on the deed of a home owned by someone seeking a reverse mortgage must be over 62 years old;
- If your husband or wife, for instance, is under 62, their name cannot be on the title if you want to qualify for a reverse mortgage. Names can be added or removed from titles;
- If a name is removed from a title, that person is no longer an owner of the home. When the person whose name is on the deed passes, the surviving spouse or the heirs are responsible for paying back the reverse mortgage loan. The loan can be repaid out of other resources or by selling the home. If there is a balance from the sale of the home after the reverse mortgage is paid, it belongs to the heirs;
- A reverse mortgage must be the only lien on a property. This means, in order to obtain a reverse mortgage you must pay off any existing traditional mortgage. You can use your reverse mortgage proceeds to pay off your traditional mortgage;
- A reverse mortgage holder is responsible for staying current on their real estate taxes and homeowner’s insurance. If you go into arrears, you take the risk of being forced into default;
- A reverse mortgage holder is responsible for maintenance of the home;
- The home must be your primary residence, which means you must live there more than 183 days a year;
- You are only permitted to live out of your home for a total of twelve months. This means, if you find yourself in, say, an extended care situation, or on an extended out-of-town work situation, you must approach your lender and discuss;
- Loan originators are not permitted to require that you purchase other financial products (i.e., annuities, long term care insurance) as a condition for getting a reverse mortgage. If they do, you should report this to HUD.