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Reverse Mortgages

It almost sounds like a fairy tale doesn’t it? You’ve reached that time in life where you’re supposed to kick back and enjoy your life but uh-oh… You suddenly find yourself with too much month, and not enough money!  Just when things seem hopeless, you learn that the house you’ve maintained and invested in all these years is finally going to pay you back! Nice huh? Who wouldn’t like monthly checks showing up in the mail?

But this is no fairy tale… Reverse mortgages do exist, and they can be either a wonderful source of low-stress money flowing in or they can turn into a huge mess if you’ve not been properly advised. (Not all reverse mortgages are created equal)

So instead of the usual information dump, I’m going to break this down into a series of commonly asked questions to help bring you up to speed.

 

What is a Reverse Mortgage?

A reverse mortgage is a special type of home loan (Often called: HECM – Home Equity Conversion Mortgage) that lets you convert a portion of the equity in your home into cash. The equity that you built up over years of making mortgage payments can be paid to you.  However, unlike a traditional home equity loan or second mortgage, borrowers do not have to repay the loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage.  You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.

 

Who qualifies for a Reverse Mortgage?

To be eligible for a FHA HECM, the FHA requires that you be a homeowner 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, have the financial resources to pay ongoing property charges including taxes and insurance, and you must live in the home. You are also required to receive consumer information free or at very low cost from a HECM counselor prior to obtaining the loan. You can find a HECM counselor online or by phoning (800) 569-4287.

 

What types of homes are eligible?

To be eligible for the FHA HECM, your home must be a single family home or a 2-4 unit home with one unit occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.

 

How is this different from a home equity loan?

With a second mortgage, or a home equity line of credit, borrowers must make monthly payments on the principal and interest.  A reverse mortgage is different, because it pays you – there are no monthly principal and interest payments.  With a reverse mortgage, you are required to pay real estate taxes, utilities, and hazard and flood insurance premiums.

 

How much money can I get?

The amount varies by borrower and depends on:

Age of the youngest borrower or eligible non-borrowing spouse

Current interest rate; and

Lesser of appraised value or the HECM FHA mortgage limit of $636,150 or the sales price

If there is more than one borrower and no eligible non-borrowing spouse, the age of the youngest borrower is used to determine the amount you can borrow.

 

How do I receive the payments?

For adjustable interest rate mortgages, you can select one of the following payment plans:

  • Tenure– equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
  • Term– equal monthly payments for a fixed period of months selected.
  • Line of Credit– unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
  • Modified Tenure– a combination of line of credit and scheduled monthly payments for as long as you remain in the home.
  • Modified Term– a combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.

For fixed interest rate mortgages, you will receive the Single Disbursement Lump Sum payment plan.

  • Single Disbursement Lump Sum – a single lump sum disbursement at the mortgage closing.

 

What if I change my mind and no longer want the loan after I go to closing?  How do I do this?

By law, you have three calendar days to change your mind and cancel the loan.  This is called a three day right of rescission.  The process of canceling the loan should be explained at loan closing.  Be sure to ask the lender for instructions on this process.  Mortgage lenders differ in the process of canceling a loan.  You should ask for the names of the appropriate people, phone numbers, fax numbers, addresses, or written instructions on whatever process the company has in place.  In most cases, the right of rescission will not be applicable to HECM for purchase transactions.

 

Will we have an estate to leave to our heirs?

When the home is sold or no longer used as a primary residence, the cash, interest, and other HECM finance charges must be repaid.  All proceeds beyond the amount owed belong to your spouse or estate.  This means any remaining equity can be transferred to heirs.  No debt is passed along to the estate or heirs.

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