Reverse Mortgages – What’s What?

Do your parents say that they want to stay in their home as long as possible?  No matter what? They’re not alone.  Most seniors would rather age in their comfortable, familiar residence, but may not think ahead to what would be needed in order to make that possible.  Does the style of their home support their needs, or what their needs will be in the future.  Do they have the funds  available to pay for needed care, home renovations for accommodation, and for their medical needs for years to come?

Seniors may have several options to acquire necessary funds to keep living at home such as traditional loans and home equity loans amongst others.  Here I will only  be discussing the option of reverse mortgages.  I want to discuss this because people usually have so many questions and misconceptions about this special type of loan.    

No, I’m not a loan broker or mortgage counselor.  All the information provided is available through the National Council on Aging’s book, Use Your Home to Stay at Home, approved by the U.S. Department of Housing and Urban Development.  I’ve taken the liberty to summarize the basic, but important facts about reverse mortgages.

So, What is a Reverse Mortgage?

It is a special type of loan designed for homeowners who are aged 62 and older.  

They call it a “reverse mortgage” because instead of the homeowner paying back the lender for the loan, the lender pays the homeowner.  

The money received is tax-free and can be used for anything.  

No monthly payments are due on the loan as long as one borrower continues to live in the home.

While you have the loan, you are charged interest, but instead of paying it monthly,  the interest is added to the amount that you borrowed.  This means that the balance gets larger the longer you have the loan.

The loan becomes due in full when the last borrower moves out of the home or passes away. 

Usually the borrower or their heirs pay off the loan by selling the home.

The Home Equity Conversion Mortgage (HECM) are the most popular reverse mortgages, representing more than 95% of the loans, so I’ll be focusing on these.  

The maximum HECM loan available is based on the following 3 things.  

  • The value of the home.
  • Age of the youngest borrower.  As least one of the homeowners must be at least 62 years old.  Older borrowers can get more money because life expectancy is used to calculate the loan payments.
  • Interest rate offered.

Ways That You Can Get Your Money

A line of credit allows you use the money as needed, up to a maximum amount. With a line of credit, there is no time limit and does not require you to make principal or interest payments.

Fixed monthly payments can be made for a set amount of time, or you can get payments every month as long as you live in your home.  

You can combine a line of credit with monthly payments.

You used to be able to borrow all the available money at once in the beginning in a lump sum.  This is no longer an option unless the money is used to pay off a mortgage or some other “mandatory obligation.”

While there is no limit to what you can spend HECM funds on, there might be limits to how much you can get in the first year.  You will likely only be able to borrow no more than 60% of the total loan amount the first year.

What Can You Use HECM Loans For?

You must first use it to pay off any existing loans against your home.

After any existing loans are paid off, you can use the money for  anything you want, including living expenses, home repairs or modifications, paying for in-home care, travel, or paying off other debts that you may have.  You can even buy a new home with your HECM reverse mortgage which might allow you to downsize or move closer to family.

What is the Cost of HECM Loans?

You can expect to pay the same closing costs of a traditional mortgage.  The fees include closing costs, origination fees, appraisal, mortgage insurance premium and other associated fees.  These costs are financed into the reverse mortgage so you do not have to pay for them up front.  

What are the Eligibility Criteria for a HECM Reverse Mortgage?

All borrowers must meet with a government-approved reverse mortgage counselor before an application can be processed.

The home must be in good condition and meet HUD standards.

Any existing loans on the home must be small enough to be paid off using the HECM funds.  You cannot use a HECM loan in combination with any other home loan, unlike traditional home equity lines of credit.

Unlike a traditional home loan, the lender is not primarily looking at your credit history, although this will be looked at.  They are primarily looking at whether you can keep up with your property taxes and insurance, and keeping the house in good condition.  Important to the lender is whether you have paid your taxes on time in the past and kept your home insured.  They will look at whether you will have enough money to live on and continue to pay your property taxes and insurance.

If there is evidence that you have had trouble paying your taxes and insurance in the past, it doesn’t automatically disqualify you from getting a HECM loan, however, they may require you to have a “set-aside.” This means that the lender with hold back some of your loan funds solely for the purpose of paying your taxes and insurance.  

What are the Advantages of a HECM Reverse Mortgage?

The requirements to qualify are less strict than for a traditional home equity loan.

Interest rates are not based on credit history.

There is no set time limit on how long you must keep the loan before you have to pay it off.

The funds available from a HECM line of credit might increase over time , depending on interest rates.

If you had an existing mortgage before getting a HECM loan, that mortgage will be paid off and you will not need to make further payments.  This will free up money to live on.  

There are no monthly payments to make on the HECM, as long as at least one borrower continues to live in the home.

You continue to own your home and can never be forced to leave, as long as you continue to pay your property taxes and insurance and keep the home in good condition.

You, or your heirs, will never have to pay back more than the value of your home, even if the value of your home goes down.

It’s a resource for paying your taxes and insurance.

If the value of your home is greater than the balance due at the time the last borrower moves out of the home or dies, then the difference may still be available to leave to your heirs.

What are the Disadvantages of a HECM Reverse Mortgage?

Closing costs can end up being a large amount and even though they are rolled up into your loan, they use up a portion of the equity that you have available.

If you already have a large mortgage on your home, you may not qualify for a HECM loan because the reverse mortgage must be large enough to pay off any existing loans.

You must be at least 62 years old to get a reverse mortgage.  If one of the married homeowners is younger than 62, then that person will be considered a “non-borrowing spouse.” If the older spouse dies first, the younger spouse might still be able to live in the home, but will not be able to get any more money from the HECM loan.  You’ll need to discuss this further with your lender.

Because the interest and mortgage insurance are added to the loan monthly, the balance on the loan gets bigger and bigger.  Because of this, you may have less to leave to your heirs, or less to keep if you want to sell the house and move somewhere else.

If you are the only homeowner and you stay in an assisted living facility or nursing home for more than a year, then you will be required to pay the balance of the loan.  This is usually done by selling the home.

Borrowers must keep their home in good repair and pay property taxes and insurance.  If you don’t, you could be faced with losing your home through foreclosure.

How Much Money Can You Get From Your House With a Reverse Mortgage?

You can borrow a percentage of the value of your home based on the borrower’s age and interest rate.

To get a feel for how much you might be able to borrow, you can use the on-line calculator at www.reversemortgage.org/About/ReverseMortgageCalculator.aspx

But remember, only a lender can tell you how much you can definitely qualify for.

Medicaid Eligibility

The rules for qualifying for Medicaid (Medi-cal in California) are complicated and vary from state to state.  Getting a reverse mortgage may affect your eligibility for Medicaid or any other programs that are based on income and resources.  If you are on Medicaid or other programs based on income, speak to a senior service counselor, social service agency or financial advisor before applying for a reverse mortgage.

A reverse mortgage is not the answer for everyone.  However, they could be just what what is needed in order for some seniors to age in place in their own home and have the resources needed to address their financial needs for years to come.

Do you have questions or comments about this article?  Leave a comment below.

 

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