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What is a reverse mortgage?
A Reverse Mortgage is a loan that is designed for borrowers age 62 and older that gives borrowers access to a portion of the equity in their home, but also freedom from the burden of monthly mortgage payments.
Sound to good to be true? Well, read on.
Just as other loans, the borrower receives a monthly statement showing the amount of interest that accrues. But borrowers have the choice to defer payments until either the home is sold, or can pay any amount they choose, if they wish with no penalty.
A borrower or their heirs own the home, not the lender. The reverse mortgage is a loan on the property that becomes due when the last borrower on the loan no longer lives in the home and all remaining equity in the home at that time would also belong to the borrower or the borrower’s heirs.
The most common type of reverse mortgage is the HECM, which stands for “Home Equity Conversion Mortgage”. This loan program was implemented by the Federal Housing Administration in 1988. While a traditional home mortgage requires the homeowner to make scheduled monthly payments over a specified term, (usually 30 years), the reverse mortgage interest is not due until the loan reaches maturity. As long as you have a good amount of home equity built up, continue living in your home as your primary residence (not leaving for a period longer than 12 consecutive months) and continue paying your property taxes and insurance you can take advantage of the reverse mortgage program.
You own your home.
With a reverse mortgage you continue to own your home, paying your property taxes and homeowners insurance just as before. Like any mortgage, you will receive a monthly statement which will outline all interest charges and balance information. The only difference will be the absence of a coupon to return your monthly payment as no payment is necessary. At anytime you are welcome to repay the interest charges partially or in full without penalty.
How Much Can You Receive?
Reverse mortgages are available to all US citizens and Permanent Residents age 62 or older with substantial equity in their home. The maximum loan amount you may qualify for is based on the youngest homeowner’s age, current rates, and home value. Because this is a loan based on life expectancy, the amount of funds that may be borrowed starts at roughly 50% of your home value at age 62 and increases slightly for older homeowners. To receive an instant estimate of your available proceeds try our free calculator.
You’re in the driver’s seat.
Some believe that once you get a reverse mortgage the bank will eat all of the homes equity leaving your heirs with nothing but a mound of debt. Wrong. While no one can predict your homes appreciation, you can rest assured that your heirs have no recourse to the reverse mortgage you took. You can choose to make voluntary repayments of the mortgage interest in part or full without penalty. That’s right; you can make payments back on your reverse mortgage. You can also deduct that mortgage interest just as you would a traditional home loan and you can pay off the entire loan at any time with cash, refinancing or selling.
How is the loan repaid?
Unless repaid voluntarily, the reverse mortgage is not due until the last surviving borrower passes away or fails to occupy the property as their primary residence. The heirs will have ample time (up to 12 months) to complete a sale or refinance transaction to pay back the balance of the loan. If your heirs choose not to act, the reverse mortgage lender will have no choice but to foreclose on the home. In the event that the sale of the property does not yield sufficient funds to pay off the balance of the loan, the government insurance that you would have paid for as a part of closing your reverse mortgage loan will cover your estate. The Lender will be reimbursed for any shortfall from the mortgage insurance fund.
Who is it for?
Anyone who has desires or needs that cannot be met with their current income levels. Reverse mortgages are a great tool to help you stay in the home you love or to simply enhance your retirement years.
Who is it NOT for?
Because there are typical costs associated with setting up a reverse mortgage, (appraisal and origination charges) it is not recommended for people who do not intend to live in their home for a reasonable amount of years to realize its benefits.
What about taxes?
Cash received by any mortgage is not considered income and will not be taxed.
The Federal Housing Administration wants you to fully understand the reverse mortgage and requires that all applicants receive independent 3rd party counseling by phone or in person. Once the counseling is completed you will receive a certificate of completion which is then signed and delivered to your lender of choice.
Even though reverse mortgages do not affect public benefits such as Social Security and Medicare, the cash proceeds can impact eligibility for those who are receiving “needs based” state or local assistance.
This is not specific to a reverse mortgage but as to any excess funds that could change the qualifications on these types of programs. Like any mortgage it pays to shop around. Compare offers from both banks and brokers alike and don’t be fooled by the common sales pitch “they’re all the same” or “we service our own loans”.
The fact of the matter is ALL reverse mortgages carry the same safeguards, and there is only one federally insured HECM so don’t settle for less money or higher interest charges.
What are the qualifications / How to Apply?
In 2014 the FHA introduced what’s called “Financial Assessment” to the reverse mortgage program requiring lenders check a borrower’s ability to repay their ongoing obligations such as property taxes and homeowners insurance. If you have had no serious late payments within last 24 months on property charges or other consumer credit and make enough income to reasonably maintain your taxes and insurance you should not have a problem qualifying for the reverse mortgage.
*This article does not represent legal interpretation or advice. This is not a commitment to make a loan. Loans are subject to borrower qualifications, including income, property evaluation, sufficient equity in the home to meet LTV requirements, and final credit approval. Approvals are subject to underwriting guidelines, interest rates, and program guidelines, and are subject to change without notice based on applicant’s eligibility and market conditions. Refinancing an existing loan may result in total finance charges being higher over life of loan. Reduction in payments may reflect longer loan term. Terms of the loan may be subject to payment of points and fees by the applicant.