It can be scary: making a major decision concerning your biggest investment, a decision involving a place that means the most to you. Deciding whether or not a reverse mortgage is right for you takes considerable thought and consideration. We hope the following questions and answers help you in this endeavor.
1. What Is A Reverse Mortgage?
A reverse mortgage is a unique loan that allows homeowner(s) 62 years of age and older to draw on the equity in their home, which is paid to the homeowner(s) in a variety of payout options. One aspect of this loan is that it does not require repayment until the homeowner(s) no longer reside in the residence, the last surviving borrower passes away or does not comply with the loan obligations such as paying property taxes and insurance, and maintaining the property to FHA guidelines. Regulated by the U.S. Department of Housing and Urban Development (HUD), Home Equity Conversion Mortgages are insured by the Federal Housing Administration (FHA) and may help older qualified homeowners meet their financial needs easing money worries for greater peace of mind.
Prior to applying for the loan, it is required that you are made aware of the terms and conditions of the loan through sources provided by HUD. Contact the Housing Counseling Clearinghouse at 1-800-569-4287 to obtain the name and telephone number of a HUD-approved counseling agency. You may also contact our office and we will provide you with the list of HUD-approved reverse mortgage counseling agencies.
2. Is My Home Eligible For A Reverse Mortgage?
Homes eligible for a reverse mortgage include single-family homes, detached homes, townhouses, and two-to-four unit properties that are owner-occupied. Condominiums must be FHA-approved. Some manufactured homes are eligible but must meet FHA guidelines. Contact your loan officer for more details on manufactured home eligibility.
3. What Are The Differences Between A Home Equity Loan And A Reverse Mortgage?
Reverse mortgages have become more popular because they allow the borrower to receive loan proceeds that do not require immediate repayment as long as you remain in your home as your primary residence, do not sell your home, at least one borrower lives in the home, you meet the basic income and credit standars, and follow loan guidelines.
On the other hand, obtaining a home equity loan (or home equity line of credit or second mortgage) requires that you have sufficient income to cover the debt- plus, you must continue to make monthly principal and interest mortgage payments.
With a reverse mortgage you must meet basic income and credit guidelines but you do not make monthly principal and interest payments. Keep in mind you must continue to pay all property related fees, taxes and homeowner’s insurance and maintain the property in good condition.
4. How Much Cash Can I Expect To Get?
The cash you can potentially receive is based on the age of the youngest borrower, the current expected interest rate, the mortgage option selected, amount of home equity and the appraised value of the home. For instance, an older individual with a higher value home typically will be eligible for more than a younger person with the same home value at the same expected interest rate. How much money you can take in the first year is limited. For more information on distribution limits go here.
5. What Happens If I Outlive The Loan? Will I Have To Repay The Lender?
No. As long as one of the borrowers on the loan note (or original non-borrowing spouse) lives in the home, continues to pay the taxes and insurance and maintains the home in good condition, you will not need to repay the loan. Once the last surviving borrower passes away (and any non-borrowing spouse), the home is sold or the obligations of the loan are not met, the loan must be repaid.
6. Must My House Be Paid Off For Me To Qualify For A Reverse Mortgage?*
No. You do not need to pay off your home to qualify. However, the loan proceeds you receive from a reverse mortgage must be used to pay off the existing mortgage or liens (if there is a mortgage balance owing). You will continue to hold title to your home subject to the mortgage securing the reverse mortgage loan.
7. Do I Have To Pay Taxes On The Cash Payments I Receive?
The cash or proceeds you receive from a reverse mortgage typically are not subject to individual income taxation. However, since you hold the title to your home, you are still responsible for property taxes, insurance, utilities, fuel, maintenance, and other home-related expenses. Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off, in part or whole. We suggest you consult your tax advisor to provide guidance for your particular situation.
8. How Will This Loan Affect My Estate And How Much Will Be Left To My Heirs?
Once the last surviving borrower dies, sells your home, or no longer resides there as the primary residence, you or your estate is responsible for repayment of the money you received from the reverse mortgage, plus interest and other fees. Any remaining equity belongs to either you or your heirs. A “non-recourse” clause prevents either you or your estate from being responsible for more than the value of your home when the loan is repaid. If the ending loan balance exceeds the home's value, the estate (heirs) can sign a deed in lieu of foreclosure releasing the property or, pay 95% of the home's appraised value, less customary closing costs & real estate commissions.
9. Should I Use An Estate Planning Service To Find A Reverse Mortgage?
HUD advises against using any service that charges a fee (except required HECM counseling) or any service that requests a lender referral fee to obtain a reverse mortgage. HUD provides this information free of charge and can direct you to HUD-approved housing agencies that offer approved reverse mortgage counseling or additional services that are free or have a minimal cost.
There is typically a reverse mortgage (HECM) counseling fee of up to $125. If the borrower cannot afford this fee, some counseling agencies will waive the fee for qualified applicants. You can find a HUD-approved housing counseling agency near you by calling 1-800-569-4287 toll free.
10. How Do I Receive My Payments?
Reverse mortgage payments can be received in one of five ways:
- Tenure: equal monthly payments
- Term: equal monthly payments for a fixed period of months as decided by the borrower
- Line of Credit: payments made in installments or at various times and in amounts dictated by the borrower(s)
- Modified Tenure: monthly payments with a line of credit
- Modified Term: monthly payments for a fixed period of months with a line of credit
* There are some circumstances that will cause the loan to mature and the balance to become due and payable. Borrower is still responsible for paying property taxes and insurance. Credit is subject to age, minimum income guidelines, credit history, and property qualifications. Program rates, fees, terms and conditions are not available in all states and subject to change.