Reverse Mortgage Frequently Asked Questions
What is HECM?
The Home Equity Conversion Mortgage (HECM) is a reverse mortgage program through the Federal Housing
Administration (FHA) and the department of Housing and Urban Development (HUD). The two branches work
together to offer this loan, the FHA insures this loan while HUD runs the program that offers it to
people.
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Why do I need a Reverse Mortgage?
Many seniors use the funds from a Reverse Mortgage loan to supplement their social security, meet any
unexpected major expenses such as medical or home improvement, as well as many other reasons. Some people
even use these funds for travel or to finance the purchase of a new residence. If you are interested in the
option of buying a new home with the proceeds from your Reverse Mortgage you will apply for the
Reverse Mortgage for
Purchase which is explained in further detail later.
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Do I/We Qualify for a Reverse Mortgage?
The eligibility requirements for a FHA Reverse Mortgage are simply that you are a homeowner at least 62
years of age or older, and that you either own your home outright or have a low mortgage balance that will
be paid off at closing with the proceeds from the Reverse Mortgage. You must also be living in the home
against which you are getting the Reverse Mortgage. Most types of homes are eligible including
single-family homes and one to four unit homes where one unit is occupied by the borrower. Condominiums and
manufactured homes must be HUD approved and meet FHA requirements. There are not any health, credit, or
income eligibility requirements at this time.
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Why do I need counseling?
This counseling is required by section 255 of the National Housing Act, and it is really looking out for
your best interest. The government wants to ensure that people are not being taken advantage of in any way,
and that you have the chance to speak with an independent third-party from whom you will receive unbiased
information on the entire Reverse Mortgage process. We will be sure to answer all of your questions so that
you can go into the process with a clear understanding of how it works and knowing that this will be the
right decision for you. If you are still trying to decide whether or not to go through with the Reverse
Mortgage the counseling may be beneficial to you because once you have all the information we provide during
the counseling you will likely have an easier time deciding what to do. A well-informed decision is always
the best decision.
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How much money will I get with a Reverse Mortgage?
The factors that determine how much you will be able to get through a Reverse Mortgage are:
- Your age (the older you are, generally the more you are able to get)
- The appraised value of your home or FHA's mortgage limit for you area, whichever is less
- The current interest rates
Clearly, the more your home is worth, and the lower the interest rates, as well as the older you are, the
more you will be eligible to borrow. There are several calculators online that will let you estimate how
much you will be eligible to borrow. If you do not have access to the internet, when you speak with a loan
officer, they will also be able to estimate what you will be eligible to receive.
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When will the loan become due and need to be paid off?
One of the major advantages of a reverse mortgage is that you are not required to make monthly payments on
it. The loan becomes due and payable if one of the following instances occurs.
- If you sell the home the Reverse Mortgage must be paid.
- If you are absent from the home for more than 12 consecutive months for health issues.
- If you transfer the title to someone else's name (this includes gifting the home to family, friends,
etc). If at any point the deed of the home changes to a name other than the original name (s) on the deed,
it will be required that the Reverse Mortgage is paid off.)
- Or when the last survivor passes away.
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What are my Payment Options?
When receiving the funds from your Reverse Mortgage loan you will have five options presented to you, they
are as follows.
- 1. Tenure: Equal monthly payments for as long as at least one of the borrowers is alive and continues
to live in the home.
- 2. Term: Equal monthly payments for a fixed amount of time, selected by the borrower.
- 3. Line of Credit: Unscheduled payments or installments at any time and in any amount you decide until
the line of credit is exhausted.
A line of credit is when you decide to keep your money in an account that you can access when you need
to instead of, or in addition to receiving monthly payments from the proceeds of your Reverse Mortgage. If
you place your funds into a credit line, based on interest, it will actually grow over time. The higher the
balance of the credit line, the faster it will grow. The interest that compounds in your line of credit is
the same percentage that is being charged on the loan plus one-half percentage point, divided by twelve.
So, if your interest rate is 5.5% your credit line will grow by 0.5% (5.5% + 0.5% = 6% / 12 = 0.5%). This
means that if your credit line at the beginning of the month has $80,000 in it, it would grow to $80,400 by
the end of the month ($80,000 x 0.5% = $400). Clearly, a growing Reverse Mortgage credit line can end up
giving you a lot more money than a credit line that does not grow. The credit line continues to grow for as
long as you keep money in it. So, until you withdraw all of the funds from the credit line it will continue
to grow interest.
Since this option is available to you it would clearly be unwise to take a lump sum of your proceeds to
put into savings or investments because you would be charged interest on the full amount of the Reverse
Mortgage lump sum that you take. Instead, consider the growing line of credit and allow your money to grow
there. The rate at which the credit line is growing is likely to be greater than most savings accounts or
safe investments anyhow so it should be looked at as a win-win.
- 4. Modified Tenure: Monthly payments for as long as you remain in the home, as well as a line of credit.
- 5. Modified Term: Monthly payments for a fixed period of time, as well as a line of credit.
If you chose to receive a lump sum, the amount will be direct deposited into your account. If you are not
familiar with this method, it is an electronic transfer into your checking account. You will likely need to
provide the lender with a voided check so that they may access your checking account to deposit the funds.
If you open a line of credit you will be given a set of coupons where you will be able to write in the
amount you would like to receive from your credit line and then it will be transferred to your account via
direct deposit (see above.) You will be able to take whatever amount you wish at closing, you will just need
to let your loan officer know how much you want to get at that time and the remainder will go into your
credit line and will be accessible to you via the coupons described above.
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Impact on Taxes/Social Security/Other Benefits
Money borrowed through a Reverse Mortgage loan is not considered taxable income. Essentially, you are
simply getting the money that you paid into your mortgage over the years back for a limited amount of time
(until you cease to reside in the home) so it is not taxable income. Your regular social security and any
other benefits such as Medicare should not be affected either.
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Limitations on Using Funds
None! You will be free to use the proceeds you have borrowed in any manner you choose. Some people use it
to pay off various bills, make improvements on their homes, pay tuition for a child or grandchild to attend
college, travel, or in any other way you may wish to spend it. It is not recommended that you simply use
the funds for investment purposes however.
The best thing to think about when deciding how to spend your equity is, the less you spend, the more
you'll have. This is simply because the less you spend right away the more you'll have, either sitting in
your line of credit, or just saving up for possible future expenses. If you spend all or most of the money
right away you may be making things difficult for yourself later on in your life.
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Cost of getting a Reverse Mortgage Loan
As with any other mortgage there are several various costs and fees associated with a reverse mortgage.
These include a credit report fee, home inspection and appraisal fees (these are separate), a loan
origination fee, mortgage insurance fee, monthly servicing fee, as well as other standard recording or
closing costs. Most of these fees are able to be paid out at closing meaning they will come out of the
total loan amount and not directly out of your pocket. Do keep in mind, that like any other loan, a reverse
mortgage does accrue interest over time meaning that the amount owed will be slowly growing. Reverse
Mortgage's may have either fixed or variable rates most have a variable rate that is likely to change along
with market conditions.
A 'nonrecourse' clause prevents the amount owed for the Reverse Mortgage to ever be higher than the value
of the home at the time the loan is repaid. Something to be aware of is that you will be retaining the
title and deed of your home which means you will be responsible for paying your property taxes and
insurance, utilities, fuel and maintenance on the property. Here's a list of the common fees so that you
can get an idea of the real cost of a Reverse Mortgage loan.
Reverse Mortgage loan costs for a 75 year old borrower in a $250,000 home:
(For purposes of an example only, as the current rates are likely different)
| Total Borrowed: |
$67,742 |
Loan Close:
(Fees paid from proceeds) |
|
| Upfront Cost |
$12,000 |
Total Mortgage Insurance
Premium Costs: |
$7,933 |
| Total Monthly Servicing Fees: |
$5,040 |
| Total Monthly Interest Charges: |
$111,056 |
| Total Loan Cost: |
$136,029 |
| Total Amount Owed: |
$203,771 |
Keep in mind when going over these fees that most of the fees that you have to pay prior to
receiving funds from your Reverse Mortgage will be paid directly out of your proceeds at the closing. This
means that more than likely at the closing table the lender will pay off any loans or mortgages you have
against the home, the inspection fees, as well as the upfront costs for the loan, so no need to be
concerned with these costs if there is enough equity in your home. This process does vary and sometimes you
will be required to pay for some services upfront such as the property appraisal or counseling, but the
upfront costs for the lender often come out of the proceeds of the loan at the closing.
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Common misconceptions about Reverse Mortgages:
- 1. People seem to think that the lender will own their home if they take out a reverse
mortgage, as stated above, this is not true. Your name(s) remains on the title and you are the owner of
the home and responsible as such for maintaining property insurance, taxes, etc.
- 2. The home must be debt-free to qualify for Reverse Mortgage - Not true; you may in fact
have a mortgage or other debt out on your home. Any debts against the home however, must be paid off
immediately with the proceeds of the Reverse Mortgage.
- 3. Only those with excellent credit, income or health will qualify - This is also incorrect.
There are not any requirements in regards to any one of those issues. The only requirements for a Reverse
Mortgage loan are that the primary borrower be at least 62 years of age and that their primary residence
is the home they are taking the loan out against.
- 4. I will have to make monthly payments on the loan - As stated previously, the loan does
not have to repaid at any point up until the borrower(s) cease to reside primarily in that home.
- 5. Only desperate senior citizens can benefit from a reverse mortgage - It is true that
some people are more in need of the income than others but this does not mean it could be just as
beneficial to those looking to plan for their estate or use It for other purposes.
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Information for Friends and Family
This information may be useful for a trusted friend or family member to go over to help you decide whether
a reverse mortgage is the best option for you. If your friend or family member has asked you to go over
this information with them it is because they are considering a reverse mortgage. A reverse mortgage can
be highly beneficial to people in several circumstances however, it is a major financial decision that
should be thought over carefully and with the advice of someone who is looking out for their best interest.
Things to consider when you are helping someone decide whether a reverse mortgage is the appropriate
choice: Another option may be better for the following circumstances:
- If the borrower will only live in the house for a brief period of time.
- Reverse Mortgage is being considered as a temporary solution for major financial situations.
- If the borrower wants to provide cash to family members or friends who may not have regard to
the future needs of the borrower.
A reverse mortgage may be the way to go in these situations:
- If the potential borrowers are seeking a way to get money without having to move or sell their
home.
- If the borrowers are seeking financial independence and no longer want to rely on support
from their friends or family.
- If the title of their home is threatened, a reverse mortgage enables them to retain the title
of the home.
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