Reverse Mortgages Explained
What Older Adults Need to Know about Reverse Mortgages
How Much Can You Borrow
The maximum loan amount depends on your age, the interest rate at the time you close and the equity in your home.
A borrower who uses an FHA-insured Home Equity Conversion Mortgages (HECM) will receive a reverse mortgage amount based on a formula which includes a Maximum Claim Amount. In general, this means the maximum amount you can receive will be determined by factors including the age of the borrowers, and the appraised value of the property (or the maximum FHA mortgage amount for your area, if lower). You should discuss the formula with your lender and your FHA-approved housing counselor.
The maximum amount that you can receive depends on your age, the interest rate at the time you close, and the appraised value of your home. For example, based on a loan at recent interest rates, a 65-year-old could borrow up to 60 percent of the home's value, a 75-year-old could borrow up to 70 percent of the home's value, and an 85-year-old could borrow almost to 80 percent of the home's appraised value --- up to the FHA loan limit for each city and county.
You can choose to receive the money several different ways.
Line of Credit: You make withdrawals whenever you choose, in whatever amount you've chosen, up to your maximum principal limit.
Lump Sum: Take all or any part of the loan at the time you close.
Tenure Plan: You receive fixed monthly payments as long as you own and occupy the home as your principal residence.
Combination: Within certain limits, you may combine the lump sum or tenure options with the line of credit.
Are there any restrictions on how I can use the loan?
No. Use it to pay medical bills or property taxes, repair your home or improve your quality of life.
When do I repay the loan?
Reverse mortgages are designed to eliminate the burden of making monthly mortgage payments. The loan will not be due until you no longer own and occupy your home as your principal residence. At that time, the money you have borrowed plus the interest and fees will be due and payable. Generally, borrowers or their estate repay the loan by selling the home. If the home is sold, you or your estate may keep the proceeds in excess of the amount due the lender.
How Reverse Mortgages Work
Homeowners 62 and older who have paid off their mortgages or have only small mortgage balances remaining are eligible to participate in HUD's reverse mortgage program. The program allows homeowners to borrow against the equity in their homes.
Senior Homeowners can receive payments in a lump sum, on a monthly basis (for a fixed term or for as long as they live in the home), or on an occasional basis as a line of credit.
Homeowners whose circumstances change can restructure their payment options.
Unlike ordinary home equity loans, a HUD reverse mortgage does not require repayment as long as the borrower lives in the home. Lenders recover their principal, plus interest, when the home is sold or refinanced by the heirs. The remaining value of the home goes to the homeowner or to his or her survivors. If the sales proceeds are insufficient to pay the amount owed, HUD will pay the lender the amount of the shortfall. The Federal Housing Administration, which is part of HUD, collects an insurance premium from all borrowers to provide this coverage.
The size of reverse mortgage loans is determined by the borrower's age, the interest rate, and the home's value. The older a borrower, the larger the percentage of the home's value that can be borrowed. For example, based on a loan at today's low interest rates, a 65-year-old could borrow up to 60 percent of the home's value, a 75-year-old could borrow up to 70 percent of the home's value, and an 85-year-old could borrow almost to 80 percent of the home's appraised value --- up to the FHA loan limit for each city and county."
Qualifying for a Reverse Mortgage
There are no asset or income limitations on borrowers receiving HUD's reverse mortgages.
There are also no limits on the value of homes qualifying for a HUD reverse mortgage. However, the amount that may be borrowed is capped by the maximum FHA loan limit for each city and county varies from $154,896 in rural areas to $290,319 in many major metropolitan areas (and even higher in Alaska, Hawaii & the U.S. Virgin Islands) depending on local housing costs."
HUD's reverse mortgage program collects funds from insurance premiums charged to borrowers. Senior citizens are charged 2 percent of the home's value as an up-front payment plus one-half percent on the loan balance each year. These amounts are usually paid by the lender and charged to the borrower's principal balance.
FHA's mortgage insurance guarantees to the borrowers that they will continue to receive their loan proceeds even if the Lender goes bankrupt. The FHA insurance also guarantees Lenders that they will get their money back with interest and fees even if the homeowners outlive the longevity tables or the property values decrease. While the FHA mortgage insurance increases the initial cost of getting a HECM reverse mortgage, it also allows the Lenders to sell HECM reverse mortgages at interest rates well below those of Fannie Mae and private lenders."
What Can You Do with the Money
The proceeds from a reverse mortgage can be used for anything: Such as daily living expenses; home repairs and home improvements; medical bills and prescription drugs; pay-off of existing debts; education; travel; long-term health care; retirement and estate tax planning; and other needs you may have.
The proceeds from a reverse mortgage are available as a lump sum, fixed monthly payments for as long as you live in the property, a line of credit; or a combination of these options.
The amount of benefit that you will qualify for, will depend on your age at the time you apply for the loan, the type of reverse mortgage you choose, the value of your home, current interest rates, and for some products, where you live. As a general rule, the older you are and the greater your equity, the larger the reverse mortgage benefit will be.
Types of Reverse Mortgages
Several distinct equity release products that offer the flexibility to customize a reverse mortgage specific to your financial needs and objectives. Loan Advisors will work with you and your advisors to help you assess your individual situation and choose the product that best meets your needs.
HECM (Home Equity Conversion Mortgage)
This type of loan represents 95% of all Reverse Mortgages.
Guaranteed by FHA/HUD
Flexible Income Payment Option
Growing Line of Credit
Maximum Lending Limit - $ 290,319 (varies by city and county)
HomeKeeper by Fannie Mae
Guaranteed by Fannie Mae
No Line of Credit Growth
Generally lower closing costs
Maximum Lending Limit - $ 333,700
Private Cash Account
Flexible Income Payment Options
Growing Line of Credit
Has an Equity Sharing High Benefit Option
Generally has higher closing costs
Generally for homes well over $500,000
No Maximum Lending Limit
Basic Loan Features
Although there are different types of reverse mortgages, all of them are similar in certain ways. Here are the features that most have in common.
With a reverse mortgage, you remain the owner of your home just like when you had a forward mortgage. You are still responsible for paying your property taxes and home-owner insurance and for making property repairs.
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.
You can use the money you get from a reverse mortgage to pay the various 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.
The amount of money you can get depends most on the specific reverse mortgage plan or 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 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 mortgages generally must be "first" mortgages, that is, they must be the primary debt against your home. So if you now owe any money on your property, you generally must either :
- pay off the old debt before you get a reverse mortgage; or
- pay off the old debt with the money you get from a reverse mortgage.
Most reverse mortgage borrowers pay off any home debt with a lump sum advance from their reverse mortgage. You may not have to pay off other debt against your home if the prior lender agrees to be repaid after the reverse mortgage is repaid. Generally only state or local government lending agencies are willing to consider "subordinating" their loans in this way.
The debt you owe on a reverse mortgage equals all the loan advances you receive (including any you used to finance the loan or to 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, then you (or your estate) keep whatever amount is left over.
But if your rising loan balance ever grows to equal the value of your home, then your total debt is limited by the value of your home. Put another way, you can never owe more than what your home is worth at the time the loan is repaid. The lender may not seek repayment from your income, your other assets, or from your heirs.
(The technical term for this cap on your debt is a "non-recourse limit." It means that the lender does not have legal recourse to anything other than your home's value when seeking repayment of the loan.)
All reverse mortgages are due and payable when the last surviving borrower dies, sells the home, or permanently moves out of the home. (Typically, a "permanent move" means that neither you nor any other co-borrower has lived in your home for one continuous year.)
Reverse mortgage lenders can also require repayment at any time if you:
- fail to pay your property taxes;
- fail to maintain and repair your home; or
- fail to keep your home insured.
These are fairly standard "conditions of default" on any mortgage. On a reverse mortgage, however, lenders generally have the option to pay for these expenses by reducing your loan advances and using the difference to pay these obligations. This is only an option, however, if you have not already used up all your available loan funds.
# Other default conditions on most home loans, including reverse mortgages, include:
- your declaration of bankruptcy;
- your donation or abandonment of your home;
- your perpetration of fraud or misrepresentation;
- if a government agency needs your property for public use (for example, to build a highway); or
- if a government agency condemns your property (for example, for health or safety reasons).
Changes that could affect the security of the loan for the lender can also make reverse mortgages payable. For example:
- renting out part or all of your home;
- adding a new owner to your home's title;
- changing your home's zoning classification; or
- taking out new debt against your home.
You must read the loan documents carefully to make certain you understand all the conditions that can cause your loan to become due.
After closing a reverse mortgage, you have three days to reconsider your decision. If for any reason you decide you do not want the loan, you can cancel it. But you must do this within three business days after closing. "Business days" include Saturdays, but not Sundays or legal public holidays.
If you decide to cancel, you must do it in writing, using the form provided by the lender, or by letter, fax, or telegram. It must be hand delivered, mailed, faxed, or filed with a telegraph company before midnight of the third business day. You cannot cancel by telephone or in person. It must be written.
Reverse Mortgage Costs
The costs associated with getting a reverse mortgage are similar to those with a conventional mortgage, such as the origination fee, appraisal and inspection fees, title policy, mortgage insurance and other normal closing costs. With a reverse mortgage, all of these costs can be financed as part of the mortgage.
You must first meet with an independent reverse mortgage counselor before applying for a reverse mortgage. The counselor's job is to educate you about reverse mortgages, to inform you about other alternative options available to you given your situation, and to assist you in determining which particular reverse mortgage product would best fit your needs if you elect to get a reverse mortgage.
This counseling session is at no cost to the borrower and can be done in person or over the telephone.