A reverse mortgage loan is a type of home equity loan for older homeowners. Like other mortgage products, reverse mortgage borrowers are expected to pay property taxes, homeowner’s insurance, and maintenance costs. There are other instances that may cause the loan to be called due such as failure to comply with the terms of the loan. Generally the loan is repaid after the borrower moves out or dies. It is also known as a home equity conversion mortgage or HECM.
Reverse mortgages are often considered a last-resort source of cash flow, but they have become a great planning tool for not just cash-strapped homeowners, but those supplementing retirement.
The first FHA-insured reverse mortgage was introduced in 1989. Such loans enable seniors age 62 and older to access a portion of their home equity without having to move.
Who would benefit from a Reverse Mortgage?
Steven Sass, program director of the Center for Retirement Research at Boston College, says a reverse mortgage makes sense for people who:
- Don’t plan to move.
- Can afford the cost of maintaining their home.
- Want to access the equity in their home to supplement their income or have money available for a rainy day.
Some people even use a reverse mortgage to eliminate their existing mortgage and improve their monthly cash flow. With a reverse mortgage loan, the loan balance does not have to be repaid until the borrower dies, sells the home or permanently moves out.
Reverse mortgage basics
- How does it work? The bank makes payments to the borrower based on a percentage of accumulated home equity.
- When does it need to be repaid? When the borrower dies, sells the home or permanently moves out. Failure to meet loan obligations may also result in the loan being called due and payable.
- Who is eligible? Seniors age 62 and older who own homes outright or have small mortgages that can be paid off at closing with proceeds from the reverse mortgage or other assets.
- How can the money be used? Retirees typically use cash to supplement their current income, pay for health care expenses or finance home improvement jobs.There are no restrictions how the money from a reverse mortgage loan must be used.
Better yet, you can never owe more than the value of your home in a reverse mortgage loan, regardless of how much you borrow. And if the balance is less than the value of your home at the time of repayment, you or your heirs keep the difference.
How much can you get?
According to the NRMLA, several factors determine the amount of funds you are eligible to receive through a reverse mortgage.
Factors that influence loan amount
- Age (or the age of the youngest spouse in the case of couples).
- Interest rate.
- Value of the home. (Lesser of appraised value or the HECM FHA mortgage limit of $625,500).
To be eligible for a reverse mortgage refinance, you must either own your home outright or have a low mortgage balance that can be paid off at the closing with proceeds from the reverse loan or through the use of other assets.
You must also use the home as your primary residence.
Generally, the older you are and the more valuable your home, the more money you can get.
The method of payment collection depends on the type of mortgage.
How to Access funds
Retirees with an adjustable-rate mortgage can collect their payments on a reverse mortgage as any of the following options:
- A lump sum
- Fixed monthly payment,
- A line of credit
- or a combination of the above options.
Holders of fixed-rate mortgages receive a lump sum.
Pros and cons of a reverse mortgage
- Does not require monthly payments from the borrower. (Taxes, insurance, and maintenance obligations are required).
- Proceeds can be used to pay other loans.
- Existing liens must be paid off at closing.
- Funds can improve monthly cash flow.
- Fees and other closing costs can be high.
- Borrower’s must maintain the house and pay property taxes and homeowners insurance.
- A reverse mortgage can complicate one’s wish to keep the house in the family.
Who wouldn’t benefit
A reverse mortgage loan wouldn’t be the best option if you can’t maintain the costs associated with the home, even without a monthly mortgage payment.
When is the loan due?
If you die or the home isn’t the primary residence for more than 12 months, the loan comes due, which means either you or the estate has the option to repay the loan or put the home up for sale to settle it. The loan may also be called due if the borrower fails to comply with the loan terms.
Homeowners interested in taking out a reverse mortgage are required to receive mandatory counseling by an independent third party, including an agency approved by the Department of Housing and Urban Development or a national counseling agency.
As you get older, it gets harder to grasp some of the terms in these kinds of transactions, so it’s not a bad idea to have someone younger who you trust, like an adult child, involved in the process.
Upkeep & Maintenance
Anyone who takes out a reverse mortgage remains responsible for paying property taxes, insurance as well as upkeep and repairs on their home. If you fail to comply, you may be required to repay your reverse mortgage early.