- What is a reverse mortgage?
- Is there more than one kind of reverse mortgage?
- What is the meaning of the term, “federally insured” HECM?
- Are reverse mortgages safe?
- What are some of the ways people are using their reverse mortgages?
- How much money can I get from a reverse mortgage?
- What are the different ways I can receive my proceeds?
- How is the loan paid off?
- What are the key requirements of the loan?
- Will taking out a reverse mortgage affect my benefits, like Social Security?
1. What is a reverse mortgage?
A reverse mortgage is a home equity loan exclusively designed for seniors 62 or older. Unlike a traditional home equity loan that you begin paying back soon after the loan closes, you have the option of not repaying a reverse mortgage until you actually leave the home or fail to comply with loan terms, which could be years or decades after your loan closes. The proceeds from your reverse mortgage will first go to pay off your current mortgage as a requirement of the loan, if one exists, along with any other mandatory obligations, with the remainder of your home equity loan funds going directly to you in a cash payment plan of your choice. These cash payments, plus the lifetime elimination of any monthly mortgage payments, can immediately improve your monthly cash flow while also helping you meet your longer-term retirement goals. A reverse mortgage requires that you maintain your property, continue to occupy the home as your primary residence, and regularly pay your property taxes and homeowners insurance.
2. Is there more than one kind of reverse mortgage?
– Home Equity Conversion Mortgages (HECMs) are federally insured and may be used for virtually any purpose. Created to help older seniors finance retirement on a limited income, they are the most common reverse mortgage today.
– Proprietary reverse mortgages are reverse mortgages not insured by the government under the HECM program and may allow a homeowner to borrow amounts in excess of the limits under the HECM program. The current limit on a HECM loan in 2023 is $1,089,300.
– Single-purpose reverse mortgages, largely offered by government and nonprofit agencies, typically restrict how the reverse mortgage funds can be used. For example, lenders may insist that funds be used for maintenance and upkeep of the home, or to cover common payments that fall under the lender’s interest, such as property taxes or homeowners insurance.
3. What is the meaning of the term, “federally insured HECM”?
A Home Equity Conversion Mortgage or HECM is the only reverse mortgage insured by the Federal Housing Administration. This insurance makes it an attractive option for homeowners, 62 and older, looking for a financial solution to improve their retirement. Insurance protection means the borrower will never have to repay more than the value of the home when the loan becomes due. Furthermore, if the housing market declines, any payments from a line of credit or monthly disbursements cannot be lowered. The borrower pays for the insurance — a 2% initial mortgage insurance premium (MIP) at closing and an annual MIP equal to 0.5% of the outstanding loan balance. You can finance the MIP into the loan.
4. Are reverse mortgages safe?
Reverse mortgages have come a long way since their pioneering predecessors. More stringent controls, tighter underwriting standards and greater across-the-board safeguards have all made reverse mortgages safer for borrowers. Here’s a brief overview of some of these consumer protections:
-Rights for spouses and partners were strengthened
When you and your spouse are co-borrowers on a reverse mortgage, neither of you has to pay back the mortgage until you both leave the home so long as the terms and conditions of the loan continue to be met. Even if one spouse moves to a long-term care facility, the reverse mortgage doesn’t have to be repaid until the second spouse moves out or passes away. And if you are an eligible non-borrowing spouse** who lives in a home on which a HECM was made after Aug. 4, 2014, you can now remain in the home after the borrowing spouse moves out or passes away, provided that you continue to meet the conditions of the loan such as paying property taxes, homeowners insurance, and otherwise complying with the loan terms. To find out if a reverse mortgage loan is right for you, click here.
-First-year lump-sum draws were tightened
To eliminate the risk that borrowers would use all their reverse mortgage proceeds the first year and not have money in reserve to pay their yearly property taxes and homeowners insurance, borrowers are now limited to an initial draw of 60% of their principal limit the first year. If mandatory obligations (things like money needed to pay off the borrower’s existing mortgage, loan origination fees and the MIP) exceed 60%, the borrower can access an additional 10% of the principal limit (not to exceed the principal limit) the first year.
-Financial Assessment was added
Before you can receive a HECM, you must undergo a Financial Assessment. Although a credit score is not a requirement for a reverse mortgage, your income and credit history will be reviewed to determine you are willing and able to uphold the financial responsibilities of the loan. If the Financial Assessment determines that you do not have enough income or assets to pay for your continuing housing expenses or if you have poor credit, you may still qualify for a reverse mortgage, but your approval will be based on your establishing a Life Expectancy Set-Aside. (LESA). A LESA functions like an escrow account on a traditional mortgage, where money has been set aside on your behalf for the specific payment of property taxes and homeowners insurance. This money (considered a “mandatory obligation”) is subtracted from your principal limit.
–Reverse mortgage counseling is required.
Before you can apply for a federally insured Home Equity Conversion Mortgage (HECM), you must first undergo an in-person or over-the-phone counseling session (whichever is more convenient for you) conducted by an independent, third-party counselor approved by the U.S. Department of Housing and Urban Development (HUD). The purpose of mandatory counseling is to help you understand that you know what a reverse mortgage is and what your obligations are under the loan. Your session will also help you compare a reverse mortgage with any other possible home equity alternatives that may be a better fit for your retirement needs.
These are just a few examples of key protections and safeguards that have been put in place over the years to increase the safety and integrity of reverse mortgages.
*An “eligible non-borrowing spouse” is a term used for your spouse who is not a co-borrower, but is eligible under the U.S. Department of Housing and Urban Development’s (HUD) rules to stay in your home after you have died. The eligible non-borrowing spouse must continue to observe all loan terms, including maintaining the home and paying property taxes and homeowners insurance.
5. What are some of the ways people are using their reverse mortgages?
Here are some ways older seniors are putting their reverse mortgages to work:
Pay Off Current Mortgage
Your reverse mortgage pays off your existing mortgage which is a requirement of the loan. Although this powerful feature means you no longer have any monthly mortgage payments, you are still responsible for maintaining your home and paying property taxes and homeowners insurance, as you would with a typical mortgage.
Create more monthly cash flow
The absence of monthly mortgage payments should free up more spendable cash for you each month. If you don’t have an existing mortgage that first needs to be paid off, you should have even more cash, which you can choose to receive via a variety of disbursement plans, including a line of credit as a buffer against financial emergencies. As a condition of the loan, you are still responsible for maintaining your home, paying property taxes, homeowners insurance, and otherwise complying with all loan terms.
Pay off high-interest debt
Replacing high-interest debt with lower-interest debt is simply smart money management, especially if you’ve been carrying a balance forward each month, incurring double-digit interest rates.
Make home improvements
Fixing up your home to make it safer and more comfortable is a great aging-in-place strategy that allows you to continue living in the home you love. You must continue to maintain your property, pay your property taxes and homeowners insurance, and otherwise comply with all loan terms.
Buy another home
Instead of fixing up your current home, sell it and use a reverse mortgage to buy another one, better suited to your current and future needs. Typically, homebuyers use some of their home sale proceeds or personal savings for their down payment and combine these funds with a reverse mortgage to complete the purchase.
Pay medical expenses now and in the future
Many reverse mortgage borrowers use a reverse mortgage line of credit as a sort of long-term care health insurance policy. Any portion of the line that you don’t touch will continue to increase, giving you a growing, go-to source of funds to help you pay for medical emergencies or your long-term care needs.
Preserve your investment portfolio
Having a reverse mortgage gives you more flexibility to manage your investments. Use funds from a reverse mortgage to keep from selling investments that are performing well or others that haven’t performed well, but that you expect to recover. Some borrowers also incorporate a reverse mortgage as a way to defend their portfolios against sequence of returns risk, which can occur when retirees early in their retirement begin drawing down their main investment accounts at the same time the stock market is declining. By drawing from a reverse mortgage instead, they may largely offset this downside risk.
Delay Taking Social Security
Use a reverse mortgage to bridge your need for retirement income until your Social Security payments begin. For every year that you can delay taking Social Security from 62 to 70, you can get as much as 8% more. That kind of investment return in a low-inflation environment isn’t easy to find nowadays.
Help your loved ones while you are alive
Help out your children or grandchildren financially while you’re still alive — help with their down payment on a new home or help with their student loans, giving them a better chance to secure a strong financial foundation for the future.
To find out if a reverse mortgage loan is right for you, click here.
6. How much money can I get from a reverse mortgage?
There’s no one-size-fits-all answer to this question because every borrower is different. That said, there are five key factors that will largely determine your reverse mortgage payout. These factors are your age, your home’s value, current interest rates, financial obligations and the payout plan you choose.
• AGE – You must be at least 62 to qualify. However, the older you are when you take out a reverse mortgage, the more cash you will have access to. That’s because the distribution period is expected to be shorter. If there are two borrowers, it’s the age of the youngest borrower that factors into how much you can access with a reverse mortgage.
• HOME VALUE – Your home’s current appraised market value will help determine available loan proceeds. The higher the value*, the higher the potential for cash.
• INTEREST RATES – Current interest rates affect how much money you receive. The lower the interest rate, the higher your available funds.
• FINANCIAL OBLIGATIONS – Fees and other financial obligations, like a mortgage or other lien that first has to be paid off, will lower your payout.
• DISTRIBUTION TYPE – The type of distribution you choose, be it a lump sum, a partial sum, a line of credit, or a monthly disbursement, can affect your loan amount. The line of credit option typically gives you the highest possible proceeds and a lump sum the lowest.
*Although your home’s value is a major factor in determining payout, there are limits on the maximum value that a lender can consider. For the government-insured Home Equity Conversion Mortgage (HECM), the maximum reverse mortgage limit you can borrow against is $1,089,300 in 2023, even if your home appraises higher. For proprietary reverse mortgages, home value limits may differ according to the lender.
To get a better idea of what kind of payout you can expect from a reverse mortgage, speak with a reverse mortgage professional. This professional will educate you on the reverse mortgage process, focus in on your specific situation and help calculate your reverse mortgage payout by considering all of the factors above.
7. What are the different ways I can receive my proceeds?
Reverse mortgages offer various payout options. Review the features of each to find the plan that most closely aligns with your financial needs and goals. Regardless of the payout plan selected, the borrower must continue to maintain the home, reside in the home as their primary residence, pay property taxes and homeowners insurance, and honor all loan terms.
Lump-Sum Plan-This plan can be selected as a fixed-rate loan or an adjustable-rate loan. Both options offer a first-year maximum draw of 60% of the principal limit, with an additional 10% of the limit made available if maximum obligations exceed the 60% limit.
If the fixed-rate option is selected, you retain the other 40% as home equity. In other words, a lump-sum fixed rate reverse mortgage payout is a one-time-only draw. With the adjustable-rate option, your remaining 40% will automatically be set up as a line of credit (unless you state otherwise), which can be accessed during the second year of your loan.
Partial Lump Sum– You take the lump sum available to you at closing and then access the remaining balance via another payment such as a Term, Tenure or Line of Credit plan.
The following plans are offered only with adjustable rates.
Term Plan-You choose to receive equal monthly payments over a finite period, such as 10 or 20 years. Although your payments will stop at some point, you will be able to continue living in the home. The right to remain in the home is contingent on complying with the loan terms, such as maintaining the home and paying your property taxes and homeowners insurance.
Tenure Plan- In this payment plan, the borrower receives equal monthly payments for life, so long as borrower does not default on the loan. Borrower must maintain the home as principal residence, pay all taxes, homeowners insurance, maintain the home, and comply with all other loan terms. With Modified Tenure plans, lender will set aside a specific amount of money for a line of credit.
Line of Credit– This is the most popular option, likely because it is also the most flexible. You draw upon your credit line as you need it, up to your principal limit. There are no minimum or maximum amounts that your lender requires you to take to keep the line open. And unlike a traditional home equity line of credit, your reverse line of credit cannot be revoked, even if your home’s value decreases or your financial situation worsens. Of course, you have to continue to maintain your property, live in the home as your primary residence, and keep paying your property taxes and homeowners insurance.
You are charged interest only on the portion of the line you use. So, you could simply keep your line open for 10, 20 or 30 years, saving it for a rainy day, and never be charged a penny of interest. Furthermore, your unused line continues to grow year after year.
You can also mix and match plans to a certain extent. These are known as modified plans that allow you to add a line of credit to your plan, such as a term or tenure plan.
The bottom line is, you have lots of disbursement options because homeowners have different needs.
8. How is the loan paid off?
A big attraction of a reverse mortgage is that, as long as you comply with the loan terms, you don’t have to pay off the loan until you leave the home. Before diving deeper into what “leave the home” actually means, understand that you have the option of paying off a reverse mortgage anytime without a prepayment penalty. You can also choose to make payments anytime to lower the outstanding balance of your reverse mortgage. If you do this, for example, with a reverse mortgage line of credit, you will in effect preserve or increase available funds for future use.
But typically, reverse mortgages are paid off upon one of following events:
- Sale of the home,
- Absence from the home for more than 12 months***, often the result of moving to an assisted living or nursing facility, or
- Death
- Leaving the home as a primary residence
If, when the loan becomes due, selling the home is the option selected, the heirs, generally, have six months to complete the sale. If the home has not sold in that period, they can request from the servicer a 90-day extension, subject to approval by HUD. One additional 90-day extension can be requested, again with HUD’s approval. Any remaining equity in the home after the sale and loan is paid to the owner or heirs.
If the loan balance is larger than the home’s sale price, HECM borrowers or their heirs are only responsible for the amount their home sells for, even if the loan balance exceeds this amount. FHA insurance, which the borrower has been paying since the loan’s inception, covers the remaining loan balance. In this case, the borrowers or heirs could simply hand over the keys to the lender and walk away, a process known as a “deed-in-lieu” transaction.
In such instances when heirs prefer to keep the home instead of selling it (perhaps the home has fallen in value and is now a relative bargain), they can do so at 95% of the home’s valuation. They can use personal savings or funds to pay off the loan or pursue a variety of financing options, including financing the reverse mortgage loan into a traditional mortgage or refinancing the home into another reverse mortgage, if they meet the loan requirements.
*It is possible to live in multiple homes in a year. However, you have to occupy the home in which you have your reverse mortgage for the majority of the year.
9. What are the key requirements of the loan?
The basic requirements are surprisingly simple and straightforward. You must be 62 or older, own your own home, and live in the home as your primary residence. Many people mistakenly believe that you can only apply for a reverse mortgage if you own your home free and clear, but the truth is, at a minimum the loan requires that the prospective borrower has sufficient home equity to be eligible.
- 62 or over
- Own and live in your home
- Have enough built-up equity to access
It’s also important to note that unlike a traditional home loan or refinance, which requires a certain credit score, a reverse mortgage has no such requirement. Your lender, however, will use a Financial Assessment to evaluate your credit to determine your ability to comply with your loan terms, which include maintaining your home and keeping your property taxes and homeowners insurance current.
Before your loan package is submitted, you will also participate in an in-person or over-the-phone counseling session (whichever is more convenient for you) conducted by an independent, third-party counselor approved by the U.S. Department of Housing and Urban Development (HUD). The purpose of mandatory counseling is to help you understand that you know what a reverse mortgage is and what your obligations are under the loan. Your session will also help you compare a reverse mortgage with other possible home equity alternatives.
10. Will taking out a reverse mortgage affect my benefits, like Social Security?
Benefits like Social Security and Medicare will not be impacted. That’s because reverse mortgage loan funds are not considered income. Some needs-based benefits like Medicaid and Supplemental Security Income (SSI), however, may be affected. Consult your benefit agency.
For more questions and answers, visit
https://www.aag.com/reverse-mortgage/
We hope this article has given you some help with things to think about. Of course, every situation is different. This information is intended to be general and educational in nature, and should not be construed as financial advice.
