What is a Reverse Mortgage?
Do you know what a reverse mortgage is and how it works? How about the pros and cons of a reverse mortgage? If you have no idea, you’re not alone. Tons of people have limited knowledge of how reverse mortgages work.
Reverse mortgages are a financial product pushed aggressively over the past decade, leading to difficulties for many people – especially seniors – who utilize the tool without understanding the risks.
Like any loan, a reverse mortgage can be advantageous, allowing homeowners to take advantage of home equity in their primary residence to cover other expenses. However, there are risks to choosing this kind of mortgage product that you should have a firm grasp of before deciding to apply for one.
Unlike conventional mortgages with a mortgage for seniors, no payments are involved. Instead, the lender makes payments to the borrower through a lump sum, monthly payments, or a credit line.
A reverse mortgage is repaid when the borrower dies, permanently moves from the home, or the property is sold. Instead of paying the bank monthly and the equity in your home growing, the bank pays you regularly, and the equity could shrink.
The Federal Government requires mortgage lenders to structure the loan so that the amount borrowed will not exceed the home’s value.
Even if the value drops due to a buyer’s real estate market or if the owner lives longer than expected, the owner or their estate will not be responsible for paying back the difference due to mortgage insurance.
Reversible Mortgages Provide Supplemental Security Income
An excellent way to think about a reverse mortgage is a possible way to finance your retirement years. Reverse mortgages provided cash-strapped individuals a way to tap their home’s equity when they have limited income.
The following information will help you understand a reverse mortgage’s main pros and cons. Educate yourself and consider your options carefully before you make a decision one way or the other.
You can choose the right action for your specific situation and needs by being informed. The information provided will be everything you need to know about reverse mortgages.
Who Qualifies For a Reverse Mortgage?
One of the questions often asked is who qualifies for a reverse mortgage. Potential borrowers also ask what are the reverse mortgage requirements.
To apply for a reverse mortgage, you need to be 62 years of age, own your home outright or have a low mortgage balance that can quickly be paid off. The youngest borrower on the title cannot be less than 62 years old.
Owners applying for this financing must also pay for property taxes, homeowners insurance, and home maintenance. You must keep it in good repair until the home sells. Lenders want to protect the home’s value, just like a regular mortgage. The property must also be owner-occupied.
Reverse Mortgage Counseling
One of the intelligent reverse mortgage requirements is meeting with a mortgage loan counselor.
Before becoming eligible for a reverse mortgage, you must have a counseling session. The counseling session will occur with an independent third-party counselor approved by The U.S. Department of Housing and Urban Development. Before you apply or incur any fees, you must have gotten this meeting done (either on the phone or in person).
Reverse mortgages years ago were used to take advantage of seniors. The Federal Government stepped in to ensure those who get reverse mortgages know precisely what they’re getting into financially. Reverse mortgage debt is like any other, so it should be understood completely. The reverse mortgage cost may or may not be what you expect. The financial assessment and review help alleviate any misconceptions.
The Consumer Financial Protection Bureau was directed by congress to study reverse mortgages as part of the Dodd-Frank Wall Street Reform and Protection Act. Given the complexity of these loan obligations, it was for the benefit of making sure consumers are informed and protected. The program helps prevent older homeowners from being taken advantage of.
Reverse mortgage counseling is an essential step for seniors to educate themselves about this type of home loan in their retirement years.Click To TweetHow Do You Get Your Money From a Reverse Mortgage
When you qualify for this type of financing, it’s possible to choose to get your money in the following manner:
- One single lump sum payment.
- Receiving monthly payments while you live in the home.
- Getting monthly payments over a certain amount of time.
- A line of credit whereby you can access money when needed.
- A combination of multiple options that combine a line of credit with term or tenure payments.
- A lump-sum payout for buying a new home.
What Are The Costs Involved With Reverse Mortgages?
A reverse mortgage has similar fees and expenses to a traditional mortgage loan product. You will be expected to pay the following:
- Origination fees.
- A real estate appraisal fee.
- Initial mortgage insurance premium.
- Points if you decide to pay them for the chance to have a lower interest rate.
- Closing costs.
It will be prudent to speak to multiple lenders just as you would with any other loan. You’ll want to compare costs and pick the lender that offers the best mortgage terms and conditions. The closing costs, appraisal fee, and mortgage insurance premiums could be higher with one lender vs. another.
Home Equity Loan vs. Reverse Mortgage
Like a reverse mortgage, a home equity loan allows you to convert your property’s equity into cash. You get the loan as a single lump-sum payment from your mortgage lender. You will make mortgage payments to pay off the home loan, which typically has a fixed rate.
However, unlike a reverse mortgage, you do not have to be 62 or more to get one. A home equity loan is an excellent option to choose from the financial institution with your existing mortgage. When you need to tap your home’s equity, this is a terrific option when you don’t meet the age requirements of a senior mortgage loan. A home equity line of credit is also an option too.
You do not make monthly mortgage payments with this type of mortgage. The loan balance does not become due until the borrower moves out of the house, passes away, and does not pay their homeowner’s insurance or property taxes.
Reverse Mortgages Explained in Video
Here is an excellent video explaining exactly what a reverse mortgage is and how they work.
Types of Reverse Mortgages
There are essentially three different types of reverse mortgages that seniors can take advantage of. Here is a description of each of these reverse mortgage options:
Single-Purpose Reverse Mortgages
A single-purpose reverse mortgage is a loan offered by some state and local government agencies and nonprofit organizations. These types of mortgages are primarily for low to moderate-income borrowers. These reverse mortgages are not available everywhere and can be used only for home repairs, improvements, or property taxes.
Federally Insured Reverse Mortgages
These reverse mortgages are known as Home Equity Conversion Mortgages or (HECMs) for short; they are backed by the U.S. Department of Housing and Urban Development (HUD). This type of reverse mortgage is the most common and also the most expensive. They also tend to be the most widely available senior mortgage option with no income or medical requirements.
They can be used for any purpose. The HECM reverse mortgage program has mortgage insurance premiums contributing to its being the most expensive reverse mortgage option.
Proprietary Reverse Mortgages
A proprietary reverse mortgage is a private loan backed by the companies that provide it. Private loans through private lenders should be scrutinized more carefully as many mortgage scams within the industry exist.
Before getting any loan, borrowers should understand how to get the best mortgage interest rates. Over the life of the loan, this can make a huge difference in what you pay. Keep in mind you want to look at the rate and all the terms that go with it.
Like other loan products, it pays to have a good credit score when applying for a reverse mortgage.
What Are The Pros and Cons of a Reverse Mortgage?
Pros of Reverse Mortgages
Here are the advantages of a reverse mortgage for seniors worth considering:
Reversible Mortgages Provide You With Income
A reverse mortgage is a loan based on age, home value, and current interest rates. If you have a lot of equity in your home, this kind of mortgage can provide you with a good amount of money.
When you get a reverse mortgage, you can get your money in the form of regular monthly payments or as a lump sum. You can then use the money to pay for your expenses or anything else you choose to spend it on.
You can also get a reverse mortgage line of credit for additional funds when needed.
In Most Cases, They Do Not Conflict With Your Social Security or Medicare Payments
In most cases, the money from your reverse mortgage does not cause any problems with your medicare benefits or Social Security. Of course, you should always check beforehand to verify that there will be no issues. Read more on how reverse mortgages can impact Medicaid.
You Can Use The Money to Buy a Smaller Home
If you are a senior looking to move into a smaller home that is easier to care for – and less expensive – you could potentially use the money from your reverse mortgage to buy a different house. However, consult with a real estate agent and financial advisor before attempting this. You want to be sure that it is a smart business move.
The Money is Tax-Free in Most Cases
In most cases, you can get the money from your mortgage without paying taxes. Again, talk with a tax professional before making any assumptions, as your specific circumstances may result in tax issues that you are not aware of.
You Won’t Owe More Than The Home’s Value
It is excellent that you don’t have to worry about owing more on your reverse mortgage than the home is worth at the time of sale. A “non-recourse” clause in the agreement for your mortgage protects you or your estate from owing money beyond the home’s value when the loan is paid off.
Many worry about taking out this type of mortgage and then winding up in a situation where their heirs must pay off the loan. Fortunately, this is not an issue, as long as your heirs do not want to get the home after you pass away. Make sure the clause is there before you agree to borrow the money.
A Spouse is Not Forced to Pay Off a Reverse Mortgage Upon Death
Your spouse will not be forced to pay off the reverse mortgage loan upon your death. Until 2013, many reverse mortgage lenders would require the borrower’s surviving spouse to repay the loan when the borrower passed away.
HUD policies allowed lenders to behave this way, leading many widows and widowers to wind up in impossible situations – ultimately into foreclosure. It was such a problem that a legal case was heard on the issue by a federal court in Washington, D.C.
The court struck down the HUD policies, and from that point onward, lenders no longer attempted to collect from widows and widowers. Now the last surviving borrower is not put in a precarious financial position.
Cons of Reverse Mortgages
Here are the disadvantages of a reverse mortgage worth considering:
Your Heirs Can’t Keep The Home Without Paying Off The Loan
If you want to leave your home to your children or other heirs, it is best to find a different option than a reverse mortgage for meeting your financial needs.
Unless your heirs pay back the loan, they will not be able to keep the house. In almost every situation where a reverse mortgage is used, the result is that the home’s equity decreases. The problem could be unfortunate if you hoped to leave your heirs as much as you could.
Many Reverse Mortgages Are Adjustable-Rate Loans
Adjustable-rate loans mean the loan’s interest rate can change throughout the loan. Adjustable-rate loans can be much more expensive than initially anticipated should the rate go up significantly.
If you want to avoid this pitfall, you will need to hunt down a reverse mortgage product that does not have an adjustable rate, which may be hard to do.
With fixed-rate mortgages being so attractive, this could be a situation where you end up paying too much for a mortgage.
It is Possible to Live Longer Than the Equity in Your Home
Reverse mortgages are usually best for older seniors. If you live long enough, you can find yourself in a bad situation – where the equity in your home is gone.
However, you still need living expenses that you can no longer get from the reverse mortgage. This type of loan should be part of an overall plan for supporting yourself in your final years, not an easy solution to fill in your income before you figure something else out.
Make sure you completely understand your finances before committing to these types of mortgages. I cannot emphasize this enough – If need be, you should meet with a qualified financial planner who can detail potential financial circumstances you may face.
Application Fees For Reverse Mortgages Can Be Costly
The fees associated with a reverse mortgage can be expensive, including higher than average closing costs and a high origination fee. Charges may include private mortgage, appraisal, and title insurance fees. Unlike a more standard loan product, the expenses that come with this kind of mortgage can be high enough to eat into the value of your home by one or more percentage points.
Moving Out of Your Home Results in The Loan Coming Due
If you run into a situation where you or your spouse (co-borrower) do not live in a house for a year or more, the loan company can come knocking for the total amount. If you anticipate any major health problems where you may not be living in your house for an extended period of time, this kind of mortgage may not be the best choice.
You may find yourself in a full-time care facility for medical care and, at the same time, have to deal with the lender asking for you to pay the entire loan in full.
Calculator For a Reverse Mortgage
With a reverse mortgage calculator, you will be able to determine the mortgage amount you may qualify for based on things such as your home value, age, and any existing mortgage balance. The loan estimate received will be based on HUD’s principal limit factor, your age, and your home’s value.
At present, HECM loans have a limit of $822,375. AAG has an excellent mortgage calculator you can use for reverse mortgages. AGG is also a reputable reverse mortgage lender worth speaking with. They are one of a handful of mortgage lenders who provide reverse mortgage loans from $625,000 up to 4 million.
If you need a significant loan, you might also want to look for a jumbo reverse mortgage, although they are harder to come by. Reverse mortgage loan limits have increased for five years in a row.
Selling a Home With a Reverse Mortgage
You might wonder what happens when you sell a home with a reverse mortgage. It is not much different than having a traditional home loan. When you sell the house, you pay the mortgage loan balance upon which the lender will close the account. The owner would keep the remaining equity.
In the event of death, reverse mortgage proceeds would go to family members based upon the will. Loan proceeds would be distributed to heirs accordingly. When selling the house, you need to make sure to take the necessary steps that are required, including probate, if necessary.
Working with a real estate attorney to ensure you follow proper procedures would be prudent. If the heirs do not plan on selling immediately upon death, the lender will typically work with the heirs if they are refinancing the loan. If the home is being sold, they will usually give them up to 12 months – 6 months with two 3-month extensions.
The lender will require evidence such as being listed on the MLS.
Can You Buy a Home With a Reverse Mortgage?
Yes, you can. The loan product is referred to as a Home Equity Conversion Mortgage or HECM. It was created to streamline home-buying purchases to cut costs.
Before creating this loan product, seniors would purchase a home, which would incur closing costs, and then once they owned the house, they would take out a reverse mortgage creating a new set of closing costs.
The HECM for Purchase rolls this into one transaction and one set of closing costs.
Is a Reverse Mortgage a Good Idea?
Lots of folks wonder if a reverse mortgage is a good idea. Unfortunately, many shady loan companies took advantage of seniors and bilked them out of money years ago.
For this reason, this kind of loan has gotten a bad wrap over the years. Those days are over. A senior’s mortgage is a good loan for those who need the money and are no longer working.
Watch For Reverse Mortgage Scams
High on the list of people who are often preyed upon by scammers are senior citizens. Many sleazy companies will do whatever they can to make others make bad financial decisions.
The reverse loan mortgage arena is undoubtedly a place where this can happen. From late-night infomercials to letters in the mail, seniors are often baited into things that don’t make much sense. Consumerist has reported on reverse mortgage scams where companies were sending deceptive mailings to seniors.
More than 10,000 consumers received reverse mortgage solicitations from a company called New View that were allegedly made to look like official government notices from the Federal Housing Administration.
The envelopes in which the documents were sent included labeling which said “Economic Stimulus Notice” and “Government Lending Division,” while the body of the solicitation identified the sender as “Federal Housing Administration Home Benefit HECM Program.” These, of course, were not federal programs but were made to look that way to deceive people.
This is just one example of the type of scams that can occur within the world of reverse mortgages. Seniors need to remember that if something looks too good to be true, it usually is!
Determine If This Kind of Loan Is Right For You
When considering this type of mortgage, it is worth your time to seek a reputable financial advisor specializing in helping seniors discuss your situation. Seek out an advisor not associated with any lenders and is not trying to sell any products.
They will cost a bit more but will not have a conflict of interest and will be more trustworthy.
Once you have a good adviser, you can work with them to determine if this type of loan product would be valuable and beneficial as part of an overall financial plan for your later years.
Remember, reverse mortgages are just one financial tool that can be beneficial or not, depending on your circumstances. Weigh the pros and cons, talk to an advisor, and create a plan to help you achieve your financial goals.
Best Reverse Mortgage Lenders
The following are some of the best reverse mortgage companies. Finding the right reverse mortgage company to work with is vital because there are many scammers in the industry.
- American Advisors Group (AAG)
- Finance of America Reverse LLC
- Fairway Independent Mortgage
- Wells Fargo
- Bank of America
- One Reverse Mortgage
- Lending Tree
- Quicken Loans
- All Reverse Morgage
- Reverse Mortgage Funding LLC
You can also search reverse mortgage companies near me or reverse mortgage banks near me to find a local lender you might like.
Reverse Mortgage Rates
It is essential to know that reverse mortgage interest rates tend to be higher than traditional loans. There are also added costs, including the two percent upfront mortgage premium, an ongoing .5% MIP, and closing costs.
Speaking to one of the above reverse mortgage companies will help get an exact idea of the costs.
Final Thoughts on a Reversible Mortgage
By now, you should have a firm grasp of reverse mortgages and how they work. Hopefully, you have found this helpful information and are better prepared should you decide to get this kind of financing.
Additional Helpful Mortgage and Finance Articles
- What to know about FHA reverse mortgages – another specialty loan product is an FHA reverse mortgage sponsored by the Federal Housing Administration. See what you need to know about this type of loan and how it can be beneficial.
- What is a good faith loan estimate – learn what you need to know about good faith loan estimates, which are a part of every mortgage a lender grants.
- What is TRID – get a complete understanding of TRID and how it works in a real estate transaction at Maximum Real Estate Exposure.
- Twenty mortgage terms you should know – when buying or selling a home, there are quite a few mortgage terminologies you will most likely encounter in a real estate transaction. Make sure you have a strong understanding of the commonly used mortgage terminology.
Use these financial articles to make intelligent decisions when buying or refinancing an existing home. A well-educated homeowner generally produces the best financial moves!
About the Author: The above Real Estate information on what reverse mortgages are was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 35+ Years.
Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.
