This article explains what a reverse mortgage is. It then details the pros and cons of the three different types of reverse mortgages, and how the funds can be distributed to the borrower. If you are over 62 and have 75%-100% equity in your home and need money for home improvements, pay taxes, or for living and medical expenses you should read this article.
What is a reverse mortgage?
How do you qualify?
How much can you get?
How do you get the funds?
How does a reverse mortgage effect your estate?
What to keep in mind.
1. What is a reverse mortgage?
A reverse mortgage is basically a home loan that cashes out your home’s equity that you, the homeowner, have gained over the years. This home loan doesn’t require a monthly payment like a traditional mortgage or second mortgage, and it doesn’t require you to repay it until the home is sold, the homeowner moves away, or until they pass away. Even if you outlive the life of the reverse mortgage, you don’t have to repay the loan as long as you are still living in the house, and as long as you keep current with your taxes and home insurance. HUD also suggests that you don’t use an estate planning service or a referral agency that charges a fee for locating a lender for you. Instead contact your local HUD agency and they will provide you with the information and leads that you need for free.
There are three different kinds of reverse mortgages: The single-purpose reverse mortgage, the federally-insured reverse mortgage, and the proprietary reverse mortgages.
Single-Purpose Reverse Mortgages
Single-purpose reverse mortgages are funded by various local and state governmental agencies and a few different nonprofit lenders. This type of mortgage has very low costs associated with it, but there are drawbacks to this particular reverse mortgage type that should be taken into consideration when thinking about applying for a reverse mortgage. The drawbacks for this type of reverse mortgage include: (1) Single-purpose reverse mortgages are not available everywhere, (2) their uses may be limited to certain activities like making home repairs or to pay property taxes, and (3) they are often only available to low to moderate income homeowners.
Federally-Insured Reverse Mortgage
The second type of reverse mortgage is the federally-insured reverse mortgage, which is also called a Home Equity Conversion Mortgage (HECM). The main advantage of this type of reverse mortgage is that it is federally insured and backed by the US Department of Housing and Urban Development (HUD). First there is more legwork involved in this type of revere mortgage then the other two types. Also before you can apply for an HECM program you are require to meet with a government-approved housing counselor. During this meeting the counselor is required to inform you about the costs associated with the HECM, the financial issues you will face with a HECM, and any possible alternative loan programs that are available to you. Generally speaking HECMs are more expensive and have more fees associated with them. Because of these extra expenses HECMs are not recommended for homeowners who don’t plan on staying in their home for a long time. On the other hand, the federally-insured reverse mortgage has many benefits that often outweigh its drawbacks. First this type of reverse mortgage is available almost everywhere, and secondly it has no income, medical, or use requirements like the single-purpose reverse mortgage has.
Proprietary Reverse Mortgage
Private companies back the final reverse mortgage, the proprietary reverse mortgage. This type of reverse mortgage is often times more expensive than traditional home loans. However, if you have a higher-value home you can get more money from a proprietary reverse mortgage than from you can from the other two types of reverse mortgages, and you won’t have to make monthly payments.
2. How do you qualify?
In order to qualify for a HECM HUD reverse mortgage, you have to own a home that meets the minimum HUD property standards (see HUD’s website for standards), be 62 years old or older, have 75%-100% equity in your home, and get counseling from a government-approved counselor about the financial requirements of the HECM program. To locate an approved consumer counselor you can call the Housing Counseling Clearinghouse at 1-800-569-1287.
Single-purpose reverse mortgages have agency specific requirements. Most maintain an age restriction of 62 years or older, and they add other requirements like income restrictions and use restrictions for the funds acquired through their program.
3. How much money can you get?
The amount of money that you can get from your reverse mortgage depends greatly on the following issues:
Borrowers age
Value of the home
Location
Interest rates
4. How do you get the funds?
There are five different ways to receive your payments: tenure, term, line of credit, modified tenure, and modified term.
Tenure payments are made in equal monthly payments to the homeowner for as long as they live in the home, up to the full amount of the approved loan amount.
Term payments are equal monthly payments that are sent to the homeowner for a predetermined number of months
Line of credit payments are determined and cashed in when the homeowner needs the money. The homeowner can either makes a withdrawals from the line of credit until the credit line has a zero balance left available, or they can request that periodic payments be sent to them until the line of credit has a zero balance available for withdrawal.
Modified tenure is a combination of the tenure and line of credit payment options. The monthly payments continue as long as the homeowner lives in the house.
Modified term is a combination of the term and the line of credit payment options. Here monthly payments are sent to the borrower for a specific number of months until the line of credit is exhausted.
The money generated by a reverse mortgage is not considered as income and therefore it is not taxable, and it also won’t affect your Social Security or Medicare benefits.
5. How does a reverse mortgage effect your estate?
One concern that you as an older adult probably have is how does a reverse mortgage affect your estate? Generally speaking, a reverse mortgage will only affect the amount of your home’s value that will be available to distribute to your heirs. When you sell your home or are no longer occupying it as your primary residence, the proceeds will first be applied to the money that was borrowed, the applicable fees, and the interest from the reverse mortgage. Any money that remains will be yours to do with as you see fit, or it will be added to your estate. However, if the amount that is owed to the reverse mortgage lender exceeds the value of the house, the debt will not be transferred to your estate. (This is a very rare occurrence. A nonrecource clause prevents the total owed at the end of the reverse mortgage to be more than the value of the home.)
6. What to keep in mind
HECM programs allow a homeowner to live in a medial care facility or nursing home for up to 12 months before they are required to repay the loan.
There are many fees associated with reverse mortgages including: origination fees, closing costs, service fees, and interest.
The amount that the homeowner will need to pay back will gradually increase until the loan is paid off.
A reverse mortgage can have either a fixed interest rate or a variable interest rate. Fluctuations in interest rates will impact the final repayment price the sale of your home will have to cover.
Most reverse mortgages will have a "nonrecource clause" which will eliminate the possibility that you will owe more then the home is worth at the end of the reverse mortgage’s life.
You are responsible for property taxes, insurance, and the maintenance of your home throughout the life of the reverse mortgage.
Unlike traditional mortgages, interest charged in a reverse mortgage is not tax deductible until you start paying off the home loan.