Reverse Mortgages

Whether you’re already retired or are approaching retirement, you’ve likely prepared for this stage in your life ahead of time. But with rising costs of living and longer life expectancy, more and more people find themselves coming up short on funds.

What’s the solution? For some, a reverse mortgage might be just the ticket to securing a comfortable retirement.

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What Is A Reverse Mortgage?

A reverse mortgage is a loan that allows homeowners over the age of 62 to convert a portion of their home equity into cash. This type of loan is especially appealing to people who want, or need, to supplement their retirement funds.

How Does A Reverse Mortgage Work?

A reverse mortgage works by using a portion of your home equity to first pay off your existing mortgage on the home – that is, if you still have a mortgage balance.

You are not required to make monthly payments on the reverse mortgage because the loan balance doesn’t come due until the final borrower moves out of the home, passes away, fails to pay taxes or insurance, or neglects to maintain the home.

While you are not required to make monthly payments, doing so could reduce your monthly interest or prevent it from accruing altogether. If you choose not to make a monthly payment on the loan, interest for that month will get added to the total loan balance.

After paying off your existing mortgage, your reverse mortgage lender will pay you any remaining proceeds from your new loan. If you own your home free and clear, you’ll receive all of the proceeds from the loan since you do not have a mortgage balance to pay off first.

As the homeowner, you get to choose how you want to receive your funds.

What Can A Reverse Mortgage Be Used For?

Whether you need financial assistance or just want access to more funds while you live your retirement and reach other financial goals, there are several reasons why you may want to consider a reverse mortgage.

•          Eliminate or lower monthly mortgage payments
•          Consolidate Debts
•          Pay for in-home care
•          Make home improvements
•          Purchase a new home with a home equity conversion mortgage for purchase
•          Supplement income to allow other assets to grow in value
•          Create an emergency fund or increase savings
•          Protect home equity from declining home markets
•          Have access to the net worth tied up in your home

What Responsibilities Come With A Reverse Mortgage?

It’s important to remember that a reverse mortgage is still a loan and, as the homeowner, you still have responsibilities tied to the loan and to the home.

•          Pay property taxes and homeowners insurance.
•          Keep the home in good condition, complete repairs and maintenance.
•          Live in the home for more than half the year as your primary residence.

If you do not stay current on your taxes and homeowners insurance, fail to maintain the home, or live in the home for less than 6 months of the year, your loan may come due.

However, if you uphold the loan obligations listed above, your reverse mortgage will not come due until the last borrower moves out of the home or passes away. When this happens, the home is sold, and the proceeds of the sale are used to pay the loan balance in full with the remaining sale proceeds going to your heirs or family trust.

A reverse mortgage is a non recourse loan. That means if the home sells for less than what is owed, you or your heirs will not be responsible for paying the difference. Depending on the type of reverse mortgage you get, the FHA or the lender will cover the difference and absorb the cost.

On the other hand, if the home sells for more than what is owed on the loan, the remaining money is given to you or your heirs.

Who Is Eligible For A Reverse Mortgage?

To be eligible for a reverse mortgage, you must meet the following criteria, at a minimum:

•          You must be 62 years or older.
•          You must have enough equity in your home – about 50%, but the required amount varies by lender.
•          You must attend a counseling session from a Department of Housing and Urban Development-approved counselor to learn more about the loan and your options.
•          You must go through a financial assessment to ensure you are in the best position to be successful with your loan.

Along with these requirements, your home also needs to qualify for the loan. Here are a few basic requirements:

•          The home must be your primary residence.
•          The home must be in good condition and meet FHA standards.
•          The home cannot be a mobile or manufactured home.
•          If the home is a condo, it must be on the HUD/FHA approved condo list. If it is not, you may still be eligible for a proprietary reverse mortgage.

How Much Does A Reverse Mortgage Cost?

Just like a traditional mortgage, there are costs associated with getting a reverse mortgage, specifically the Home Equity Conversion Mortgage (HECM). These costs are typically higher than those associated with a traditional mortgage. Here are a few fees you can expect.

Upfront MIP: The upfront mortgage insurance premium (MIP) is paid to the FHA when you close your loan. The MIP protects you and the lender by making the loan a nonrecourse loan. If the home sells for less than what is due on the loan, this insurance covers the difference so you won’t end up underwater on your loan and the lender doesn’t lose money on their investment.

It also protects you from losing your loan if your lender goes out of business or can no longer meet its obligations for whatever reason. In that case, FHA takes over so you can still access your loan proceeds.

The cost of the upfront MIP is 2% of the appraised value of the home or $726,535 (the FHA’s lending limit), whichever is less. For example, if you own a home that’s worth $250,000, your upfront MIP will cost around $5,000.

Along with an upfront MIP, there is also an annual MIP that accrues annually and is paid when the loan comes due. This charge is usually around .5% of the loan balance.

Origination fee: The origination fee is the amount of money a lender charges to originate and process your loan. This cost is 2% of the first $200,000 of the home’s value plus 1% of the remaining value after that.

The FHA has set a minimum and maximum cost of the origination fee, so no matter what your home is valued, you will not pay less than $2,500 or more than $6,000.

With the same $250,000 home mentioned above, the origination fee would cost around $4,500 (2% of $200,000 and 1% of $50,000).

Servicing fee: The servicing fee is a monthly charge by the lender to service and administer the loan and can cost up to $35 each month.

Appraisal fee: Appraisals are required by HUD and determine the market value of your home. While the true cost of your appraisal will depend on factors like location and size of the home, they generally cost between $300 and $500.

Third-party charges: These are the smaller charges from businesses other than your lender. These costs may include:

•          Credit report fees: $30 – $50
•          Document preparation fees: $50 – $100
•          Courier fees: $50
•          Closing fee: $150 – $800
•          Title insurance: Depends on your loan and location

Most of these costs can be rolled into your loan, but you can pay any of them out of pocket, if you want to forgo financing them. Talk to your lender to get the most up-to-date costs as fees may change over time.

What Are The Pros And Cons Of Reverse Mortgages?

As with any major financial decision, you should weigh the pros and cons of getting a reverse mortgage and decide if it is right for you. We also recommend speaking to a financial advisor.

Pros

Depending on your needs and financial goals, a reverse mortgage may benefit you in the following ways:

•          You remain the owner of the home. Your name stays on the title.
•          You can access your equity without selling the home or paying a monthly mortgage.
•          There are no credit score requirements at this time, though credit history will be reviewed during a financial assessment.
•          You are protected from declining home values since it is a nonrecourse loan.
•          There are no restrictions on how proceeds are spent. In other words, you can use the funds on whatever you want or need.
•          Even after the borrower dies, nonborrowing spouses who are not listed on the mortgage may still live in the home.
•          If the loan comes due because you pass away and your heirs wish to keep the home, they can purchase the home for 95% of its appraised value or the balance of the loan – whichever is lower. They can also refinance that cost into a traditional mortgage.

Cons

Although there are a number of benefits that come with a reverse mortgage, the loan can also have some points that you will want to consider.

•          Since you’ll be borrowing against the equity in your home, you’ll decrease your equity and increase your amount of debt.
•          If you choose not to make payments, the loan balance will increase over time as interest accumulates.
•          While heirs will have a few options for keeping your home after you pass away, you may not be able to pass on the home to your heirs without a cost to them.
•          The loan may come due for several reasons. For example, the loan must be for your primary residence. If you do not live in the home for more than 6 months, the loan could come due. On the same note, a reverse mortgage will come due if you move out of the home or pass away. It could also come due if you fail to uphold your responsibilities of the loan, including maintaining the home and paying your property taxes and homeowners insurance.
•          As stated above, you must continue to pay property taxes and homeowners insurance. If you do not stay current on these expenses, your loan may come due.

"This material is not from HUD or FHA and has not been approved by HUD or a government agency."