Reverse Mortgages for Seniors
A reverse mortgage is a loan against the equity in your home that you do not have to pay back for as long as you live there. Seniors at least 62 years old can turn the value of their home into cash without having to move or to repay a loan each month. The cash from a reverse mortgage can be paid to the homeowner in several ways:
- As a single lump sum of cash
- As a regular monthly cash advance
- As a “credit line” account that lets you decide when and how much of your available cash is paid to you
- As a combination of these payment methods
You typically don’t have to pay anything back until you die, sell your home, or permanently move out of your home. To be eligible for most reverse mortgages, you must have sufficient home equity and be 62 years of age or older.
Most reverse mortgages are home equity conversion mortgages (HECMs). There are other types of “proprietary” reverse mortgages that are not HECMs, but almost every reverse mortgage is a HECM loan. HECM loans are insured by the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA).
How a Reverse Mortgage Works - With a reverse mortgage, you don’t have to make monthly repayments. So you don’t need a minimum amount of income to qualify for a reverse mortgage. You could have no income, and still be able to get a reverse mortgage. Reverse mortgages typically require no repayment for as long as you or any co-owner live in the home. The lender sends you cash and you make no repayments. As your debt grows, your equity shrinks --- unless your home’s value is growing at a high rate. Informed reverse mortgage borrowers want to spend down their home equity while they live in their homes, without having to make monthly loan repayments.
Home Ownership - With a reverse mortgage, you remain the owner of your home. So you are still responsible for paying your property taxes and homeowner insurance. When the loan is over, you or your heirs must repay all of your cash advances plus interest. Reputable lenders don’t want your house; they want repayment.
Reverse Mortgage Fees - You can use the money you get from a reverse mortgage to pay fees that are charged on the loan. This is called “financing” the loan costs. The costs are added to your loan balance, and you pay them back plus interest when the loan is over. HECM loan costs include an origination fee, third-party closing costs, a mortgage insurance premium, a servicing fee and interest.
Mortgage Insurance Premium (MIP) - A mortgage insurance premium is charged on all HECM loans. The cost, which may be financed with the loan, is charged in two parts: 2% of your home’s value (or 2% of the 203-b limit in your area, whichever is less) is charged up front at closing, and 0.5% is added to the interest rate charged on your rising loan balance. HECM insurance guarantees that you will receive your promised loan advances, and not have to repay the loan for as long as you live in your home. The insurance also guarantees that your total debt can never be greater that the value of your home at the time the loan is repaid.
Reverse Mortgage Loan Amounts - The amount of money you can get depends on the specific reverse mortgage program you select. It also depends on the kind of cash advances you choose. Some reverse mortgages cost a lot more than others, and this reduces the amount of cash you can get from them. Within each loan program, the cash amounts you can get generally depend on your age and your home’s value. The older you are, the more cash you can get. And the more your home is worth, the more cash you can get. The specific dollar amount available to you may also depend on interest rates and closing costs on home loans in your area.
Reverse Mortgage Debt Payoff - Reverse mortgages generally must be “first” mortgages. If you now owe any money on your property, you generally must pay off the old debt before you get a reverse mortgage. Or you can pay off the old debt with the money you get from a reverse mortgage. Most reverse mortgage borrowers pay off any prior debt with an initial lump sum advance from their reverse mortgage.
Reverse Mortgage Debt Limit - The debt you owe on a reverse mortgage equals all the loan advances you receive (including any used to finance loan costs or pay off prior debt), plus all the interest that is added to your loan balance. If that amount is less than your home is worth when you pay back the loan, you (or your estate) keeps whatever amount is left over. But you can never owe more than what your home is worth at the time the loan is repaid. This overall cap on your loan balance is called a “non-recourse” limit. It means that the lender, when seeking repayment of your loan, does not have legal recourse to anything other than your home’s value. The lender may not seek repayment from your income, your other assets, or your heirs.
Reverse Mortgage Counseling Requirement - Reverse mortgage counseling is a mandatory part of the reverse mortgage application process. HUD certifies housing counselors around the country to give homeowners impartial education about reverse mortgages. The goal is to help borrowers assess whether a reverse mortgage is the right choice for their financial situation. Reverse mortgage counseling can be done over the phone or face-to-face, and sessions generally run from 60-120 minutes. After the counseling session, the counselor will mail a signed copy of the HECM Counseling Certificate to the homeowner. This certificate is presented to the lender with the reverse mortgage application.
Reverse Mortgage Repayment - A HECM loan must be repaid in full when the last surviving borrower dies or sells the home. It also may become due and payable if you permanently move to a new principal residence, fail to pay property taxes or homeowner's insurance, or allow the property to deteriorate and fail to correct the problem.