Blog, Managing Life After 50

Reverse Mortgages – A Primer

[vc_row][vc_column][vc_column_text]A so-called “reverse mortgage” is a special type of home loan that allows borrowers to convert a portion of the equity in their home into cash and then not have to make ongoing monthly payments on the loan. Reverse mortgages are generally available only to borrowers who are at least 62 years old. People use money borrowed under reverse mortgages to supplement retirement income, pay off an existing “forward” mortgage, meet medical expenses, make home improvements, and for a myriad of other purposes.

Reverse mortgages are widely misunderstood, but if you have cash needs, one might make sense for you. You should evaluate the suitability of a reverse mortgage for you based on a number of factors which are subjective and specific to your circumstances and needs.[/vc_column_text][/vc_column][/vc_row][vc_row css=”.vc_custom_1490090270172{margin-bottom: 30px !important;}”][vc_column][woodmart_categories orderby=”” order=”ASC” style=”carousel” spacing=”30″ categories_design=”alt” slides_per_view=”3″ hide_pagination_control=”yes” hide_prev_next_buttons=”yes” ids=”” number=”3″ hide_empty=”yes” wrap=”no” autoplay=”no” lazy_loading=”no” scroll_carousel_init=”no”][/vc_column][/vc_row][vc_row css=”.vc_custom_1490088912561{margin-bottom: 30px !important;}”][vc_column][woodmart_title color=”white” style=”underlined” woodmart_css_id=”5e38484bee123″ title=”.” title_width=”100″ woodmart_empty_space=””]

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How Reverse Mortgages Work

In a traditional mortgage loan, the lender advances a large sum of money upfront that the borrower uses to buy a home or refinance an existing home loan. The borrower then pays the mortgage loan down over time with monthly payments. The traditional (“forward”) mortgage loan balance starts out large and is paid down over time.

In a reverse mortgage, the borrower already owns the home, and owes very little or nothing on it. Under the terms of the reverse mortgage, the borrower will receive some combination of upfront and/or ongoing monthly (or periodic) payments from the lender. The reverse mortgage loan balance starts low and grows larger over time.

Depending on the design of the reverse mortgage, the lender may pay you a (smaller) lump sum amount upfront, and then continue to pay you monthly amounts thereafter. The size of your upfront and monthly payments will depend on the value of your home, the age of the youngest co-borrower, the rate at which interest accrues on the loan, any mortgage insurance premiums that accrue[1], an assessment of your ability to pay ongoing taxes and insurance, and other features of the reverse mortgage product you choose.[/vc_column_text][/vc_column][/vc_row][vc_row content_placement=”top” css=”.vc_custom_1490111230754{margin-bottom: 30px !important;}”][vc_column width=”1/2″]

[vc_column_text]The money you get upfront and/or monthly is usually tax-free and generally will not affect your Social Security or Medicare benefits. When the last surviving borrower (or non-borrower spouse) dies, sells the home, or has no longer lived in the home as a principal residence for more than 12 months, the reverse mortgage loan has to be repaid. Sometimes that means selling the home to get money to repay the loan. In certain loan programs, a non-borrowing spouse may be able to remain in the home, as long as they went to counseling and have agreed to the loan terms.

Reverse mortgage lenders generally charge an upfront origination fee and other closing costs, and some charge servicing fees over the life of the mortgage. For FHA insured reverse mortgage loans, they also collect both upfront and ongoing mortgage insurance premiums.

 The rate used to accrue interest on reverse mortgages generally can be fixed or variable, but is usually variable.[2] This means the rate is tied to a designated financial index and will change as the market level of that financial index goes up and down. Interest and MIP on your reverse mortgage is not deductible on your income tax returns until the year it is paid – usually when you pay off all or a portion of the loan.

[1] Jumbo reverses mortgages (those with balance limits in excess of the FHA lending limit of $636,150) do not have mortgage insurance premiums.

[2]Jumbo reverse mortgages are fixed rate.[/vc_column_text][/vc_column][vc_column width=”1/2″][vc_column_text]Variable Rate Loans

Variable rate loans generally provide more options on the timing and magnitude of amounts paid to you through the reverse mortgage. Fixed rate reverse mortgages are less flexible, tending to require you to take your loan as a lump sum at closing. The total amount you can borrow with a fixed rate loan is generally less than the amount you could get with a variable rate reverse mortgage loan.[/vc_column_text]

[vc_column_text]You Keep Your Title

As with other types of mortgage loans, you keep the title to your home. You are still responsible for paying property taxes, insurance, utilities, fuel, maintenance, homeowner’s association (HOA) fees, and other expenses. If you fail to pay your property taxes or homeowner’s insurance premium in a timely manner, or fail to maintain your home, the lender may declare you in default on your loan and require you to repay it in full or they will foreclose.[/vc_column_text]

[vc_column_text]Life Expectancy Set Aside Amount

Your lender will assess your financial condition when you apply for the mortgage. Based on this assessment, the lender may require a “Life Expectancy Set-Aside” amount to pay your property taxes, homeowner’s insurance premiums, HOA fees, and flood insurance premiums (if any) during the term of the loan. The lender will hold the set-aside amounts in escrow and use them to pay your taxes and insurance as they come due. The set-aside amount reduces the funds you receive upfront and/or in your monthly payments. You are still responsible for maintaining your home.[/vc_column_text]

[/vc_column][/vc_row][vc_row css=”.vc_custom_1490088912561{margin-bottom: 30px !important;}”][vc_column][woodmart_title color=”white” style=”underlined” woodmart_css_id=”5e3848695623e” title=”.” title_width=”100″ woodmart_empty_space=””] [/vc_column][/vc_row][vc_row][vc_column][woodmart_products post_type=”bestselling” layout=”carousel” slides_per_view=”6″ hide_pagination_control=”yes” hide_prev_next_buttons=”yes” taxonomies=”171″ autoplay=”no” center_mode=”no” wrap=”no” sale_countdown=”0″ stock_progress_bar=”0″ highlighted_products=”0″ products_bordered_grid=”0″ lazy_loading=”no” scroll_carousel_init=”no”][vc_column_text]What Happens If You Die?

If you signed as a borrower on the loan and your spouse did not[3], the rights of your spouse to stay in the home are dependent on the category of the loans and the lender’s terms. With FHA insured reverse mortgages (called HECM[4] loans), your spouse may continue to live in the home even after you die if he or she pays the property taxes, insurance, and HOA fees, and continues to maintain the property. But your spouse will stop getting money from the undrawn portion of the HECM loan since he or she wasn’t part of the loan agreement. With loans not insured by the FHA (proprietary loans), when you die, your spouse or estate may be required to pay off the loan, which may require selling the property. You need to clearly understand the offered terms before you take out the loan

[3] Even though your spouse is not an obligor on the loan, he or she will still have paperwork to sign in order for you to be able to get the loan.

[4] HECM is an acronym for Home Equity Conversion Mortgage . . . HECMs are federally-insured reverse mortgages that are backed by the U. S. Department of Housing and Urban Development (HUD).

You or your heirs do not have to be pay off the loan until the home is sold (unless a default occurs). The loan is repaid from the proceeds of the property sale. Any remaining equity in the home after the loan has been repaid belongs to you, your surviving spouse, or your heirs.

Depending on how long you live and the rates at which interest and mortgage insurance premiums accrue on your loan, the accumulating amount owed to the lender on a reverse mortgage loan can come close to, or even exceed, the value of your home. This means that little or no equity could be left for you, your surviving spouse, or your heirs. However, FHA insured reverse mortgages have in them what is known as a “non-recourse” clause. This means that you, or your estate, cannot owe more than the value of your home when the loan becomes due and the home is sold. FHA insurance is used to pay any difference.

Generally, with a HECM, if you or your heirs want to pay off the loan and keep the home rather than sell it, you or they would not have to pay more than the appraised value of the home, and in some cases no more than 95% of the appraised value

Reverse Mortgage Loan Options

Categories

When considering whether a reverse mortgage is right for you, be aware that there are three general categories with differing features, benefits and costs. Depending on your circumstances, one category may meet your needs better than the others.[/vc_column_text][/vc_column][/vc_row][vc_row content_placement=”top”][vc_column offset=”vc_col-md-3 vc_hidden-sm vc_col-xs-12 vc_hidden-xs”]

[/vc_column][vc_column offset=”vc_col-md-6 vc_col-xs-12″][woodmart_title style=”underlined” title=”Home Equity Conversion Mortgages (HECMs)”][vc_column_text css=”.vc_custom_1490173273949{margin-bottom: 20px !important;}”]Most reverse mortgage loans are categorized as Home Equity Conversion Mortgages (HECMs). These loans are insured by the FHA, and borrowers are charged a mortgage insurance premium (MIP). They are limited in size to $636,150. Proceeds may be used for any purpose, except making certain investments. These loans have caps on origination fees, and borrowers are not charged monthly servicing fees. Borrowers and non-borrowing spouses must attend HECM counseling. Even though non-borrowing spouses are not obligated on the loan, they are required to sign documents indicating that they understand the terms of the loan. Non-borrowing spouses do retain rights of survivorship in the home after the borrowing spouse dies, meaning they can continue living in the home.[/vc_column_text][woodmart_title style=”underlined” title=”Proprietary Reverse Mortgages”][vc_column_text css=”.vc_custom_1490173302230{margin-bottom: 20px !important;}”]Reverse mortgages in excess of HECM lending limits are called jumbo loans and are categorized as proprietary reverse mortgages offered by private lenders. There is no mortgage insurance on these loans, and borrowers are thus not charged MIPs. Loan proceeds may be used for any purpose. These loans have no caps on origination fees, and the lender may charge borrowers monthly fees for loan servicing. Borrowers and non-borrowing spouses may or may not need to attend pre-loan counseling, depending upon the lender’s program. Non-borrowing spouses are not obligated on the loan, and they may not be required to sign documents indicating that they understand the terms of the loan. Non-borrowing spouses may or may not retain rights of survivorship in the home after the borrowing spouse dies. You should carefully study each lender’s program terms.[/vc_column_text][woodmart_title style=”underlined” title=”Single Purpose Reverse Mortgages”][vc_column_text css=”.vc_custom_1490173306198{margin-bottom: 20px !important;}”]Single purpose reverse mortgages are the least expensive option, and programs vary. They are offered by some state and local government agencies, as well as non-profit organizations. You may use proceeds from these loans only for program-designated purposes, such as to pay for home repairs, improvements, or property taxes. Homeowners with low or moderate incomes may qualify for these loans. Terms and requirements vary by program, and you should study them carefully.[/vc_column_text][/vc_column][vc_column width=”1/4″ offset=”vc_hidden-sm vc_hidden-xs”] [/vc_column][/vc_row][vc_row][vc_column][vc_column_text]

Disbursement Options

Reverse mortgage lenders generally offer a choice of several disbursement options. For fixed interest rate reverse mortgages, your choice will likely be limited to a single lump sum disbursement plan whereby you will receive the amount at the close of the loan. A single disbursement option typically offers less money than other reverse mortgage disbursement plan options because of first year principal limitations[5] and the fact that you do not benefit from increases in the value of your home.

[5] This amount is called your “initial principal limit.” Your lender will calculate how much you can borrow, based on your age, the interest rate, the value of your home, and your financial assessment.[/vc_column_text][/vc_column][/vc_row][vc_row css=”.vc_custom_1490088912561{margin-bottom: 30px !important;}”][vc_column][woodmart_title color=”white” style=”underlined” woodmart_css_id=”5e38487ccb39a” woodmart_empty_space=”” title_width=”100″ title=”.”]

[/vc_column][/vc_row][vc_row][vc_column][woodmart_products layout=”carousel” order=”ASC” slides_per_view=”4″ hide_pagination_control=”yes” hide_prev_next_buttons=”yes” taxonomies=”139″ autoplay=”no” center_mode=”no” wrap=”no” sale_countdown=”0″ stock_progress_bar=”0″ highlighted_products=”0″ products_bordered_grid=”0″ lazy_loading=”no” scroll_carousel_init=”no”][vc_column_text]For adjustable interest rate mortgages, you will likely be able to select one of the five disbursement plans. The five plans are referred to as 1) Tenure, 2) Term, 3) Line of Credit, 4) Modified Tenure, and 5) Modified Term. You may be able to change your payment option for a small fee, as long as you have not drawn all of your funds already.[/vc_column_text][/vc_column][/vc_row][vc_row content_placement=”top”][vc_column offset=”vc_col-md-4″][vc_column_text]HECMs generally give you larger loan advance rates against the value of your home than proprietary loans[6]. The interest rate on HECM loans is generally lower, but you have to pay MIP amounts that you will not have to pay on proprietary loans. In the HECM program, a borrower is generally allowed to live temporarily in another residence (such as a nursing home) for up to 12 consecutive months without triggering a requirement to pay off the loan. You must continue to pay property taxes, insurance, and HOA fees while you have the loan, and you must continue to maintain your home, even if you are temporarily residing elsewhere

[6] The higher HECM advance rate means that a HECM loan is likely a better choice for borrowers who are seeking maximum loan proceeds and whose homes are worth more than the FHA lending limit of $636,150 but less than about $1,000,000. After that, borrowers will likely qualify for a larger loan under a proprietary program than the HECM program. Note that HECM loan rates are lower than those of proprietary loans, but also require MIP payments. If you have a high value loan, you or your accountant will need to study the competing costs and terms; your HECM counselor can help as well.

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Amount You Can Borrow

The amount you can borrow with a reverse mortgage depends on several factors, including:

  • The lesser of the appraised value, purchase price of your home, or the FHA mortgage limit of the HECM lending program
  • The age of the youngest borrower or eligible non-borrowing spouse
  • Expected interest rate at the time of origination
  • An assessment of your willingness and ability to pay property taxes, homeowner’s insurance, and HOA fees as they come due
  • The disbursement option and type of reverse mortgage you select.

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[/vc_column][vc_column offset=”vc_col-md-4 vc_col-xs-12″][vc_column_text]In general, the older you are, the more equity you have in your home, and the lower the absolute amount you owe, the more money you can obtain. If there is a non-borrowing spouse, his or her age is taken into account due to rights of survivorship under the HECM program. If there is more than one borrower and no eligible non-borrowing spouse, the lender will use the age of the youngest borrower to determine the maximum loan amount.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]

Costs Involved

Like forward mortgages, reverse mortgages can have high levels of fees and charges. Upfront origination fees are capped by HUD for HECM loans; proprietary loans generally do not have such caps.

You can finance most of the upfront costs of your reverse mortgage, paying them from the proceeds of the loan. The benefit of this is that you do not have to pay for them out of your pocket. The drawbacks are:

  • You are still incurring the costs and effectively reducing the net loan amount available to you
  • You will accrue interest and MIP on the higher balance

If you pay the upfront MIP out of pocket, the amount paid may be tax deductible for you in the year paid.[/vc_column_text][/vc_column][/vc_row][vc_row content_placement=”top” css=”.vc_custom_1490111252929{margin-bottom: -35px !important;}”][vc_column offset=”vc_col-md-4 vc_col-xs-12″][vc_column_text]The charges and fees for HECM loans are described in greater detail below. Other reverse mortgage programs may include other categories of charges and fees, and the fees may be higher or lower. You should carefully consider any charges and fees you will incur when deciding whether to obtain a reverse mortgage loan, as well as the category of loan and lender.

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