Reverse Mortgages (Loans Using Home Equity Conversion)
About
About Reverse Mortgages (Loans Using Home Equity Conversion)
A reverse mortgage is a type of loan available to homeowners who are at least 62 years of age. Reverse mortgages are a way for older homeowners to borrow money based on the equity in their homes. Reverse mortgages can be a useful tool for homeowners in retirement. It is important to consider the terms, costs, and risks of obtaining one. Some of the risks related to getting a reverse mortgage may include losing the home to foreclosure, heirs may inherit less, the financial costs and expenses associated, issues with your ability to get retirement benefits, and other complications such as rules and caveats to reverse mortgages. You should be wary of any reverse mortgage offer unless you can understand the terms well.
What You Need To Know
A reverse mortgage works by the lender actually making payments to you. You can choose to get a lump sum, monthly payments, a line of credit, or some combination of those options. The interest and fees associated get rolled into the reverse mortgage loan balance each month. That means the amount you owe grows over time, while your home equity decreases. You get to keep the title to your home the whole time, and the balance isn't due until you move out or die. When that time comes, proceeds from the home’s sale are used to pay off the debt. If there’s any equity left over, it goes to the estate. If not, or if the loan is actually worth more than the house, the heirs aren’t required to pay the difference. Heirs also can choose to pay off the reverse mortgage or refinance if they want to keep the property.
Reverse Mortgage Pros:
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If you don’t have a lot of savings or investments but do have much equity built up in your home, a reverse mortgage will allow you to get the money that you can use to cover expenses in your retirement.
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Instead of selling your home to get cash out, you can keep the house and still get cash out of it. This means you don’t have to worry about potentially downsizing or getting priced out of your neighborhood if you have to sell and move. But this only works if you can keep up with property taxes and insurance costs.
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You can use the money from a reverse mortgage to pay off an existing home loan. This could free up money to pay other monthly expenses since you no longer have to pay that loan’s monthly note.
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The money you get from a reverse mortgage is considered a loan rather than income and will not be taxed by the IRS.
Reverse Mortgage Cons:
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You MUST live in the house and pay all property taxes, insurance, and other costs like you would with a traditional mortgage.
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If you become delinquent on these expenses during the reverse mortgage period or spend most of the year living outside the property, you could lose your home to foreclosure.
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When you die, your heirs will be required to pay the full loan balance or 95% of the home’s appraised value, whichever is less, to keep the house. If they do not, they will have to sell the house or turn it over to the lender to satisfy the debt. If you want your children or heirs to inherit your home, a reverse mortgage is something you should NOT do.
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A reverse mortgage eats away at your home’s equity.
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If you have money from the reverse mortgage put into a savings account or give it away, this could make you ineligible for need-based government programs like SNAP, Medicaid, or Supplemental Security Income (SSI).
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There are a lot of rules and details to reverse mortgages. The risks may not be worth the extra cash. You should NOT enter any reverse mortgage offer unless you understand the terms well.
There may be several differences between regular mortgages and reverse mortgages. Differences include:
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Loan Amount: Regular mortgages allow borrowers to take out a loan for a specific amount. They can then use that money to buy a property. Reverse mortgages allow borrowers to access the equity in their home. They can do this without having to make a lump sum payment.
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Interest Rates: Regular mortgages tend to have lower interest rates than reverse mortgages.
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Repayment: Borrowers must make regular payments over a set period of time. Repayment on reverse mortgages happen when the borrower dies, moves out of the home, or sells the home.
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Eligibility: Borrowers must meet certain income and credit requirements for regular mortgages. Borrowers must be a certain age and have a equity in the home for reverse mortgages.
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Tax Implications: Regular mortgages are tax-deductible. Reverse mortgages are not tax deductible.
See the chart below for more differences between regular mortgages and reverse mortgages.
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Differences Between Regular Mortgages And Reverse Mortgages |
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Regular Mortgages |
Reverse Mortgages |
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Age Requirement |
None. You cannot legally commit to a mortgage until you’re 18, unless you have a co-signer |
Must be 62 or older |
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What You Borrow |
Usually a lump sum to buy your property |
An amount based on a percentage of the equity you’ve built up in your property |
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How The Payments Work |
You pay the lender each month to pay back the loan, plus taxes and insurance |
The lender pays you a lump sum or monthly payments — like an advance payment on your equity But you still must pay taxes and insurance, and you must maintain the property |
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The Balance You Owe |
Goes down over time Generally, your monthly payment already includes interest |
Goes up over time You will owe more than the amount you borrowed because interest is added every month The mortgage must be repaid when you die or move out – usually by selling your home |
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Is Interest Tax Deductible? |
Yes — for the interest paid each year, up to a certain amount |
Not until you pay the loan back |
To qualify for a reverse mortgage loan you must be 62 years of age or older. To qualify you must also:
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Your home must be your principal residence, meaning you live there the majority of the year.
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You must either own your home outright or have a low mortgage balance. Owning your home outright means you do not have a mortgage on it anymore. If you have a mortgage balance, you must be able to pay it off when you close on the reverse mortgage. You can use your own funds or money from the reverse mortgage to pay off your existing mortgage balance.
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You cannot owe any federal debt, such as federal income taxes or federal student loans. You may use money from the reverse mortgage loan to pay off this debt.
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You must have enough of your own money or agree to set aside part of the reverse mortgage funds at your loan closing to pay ongoing property charges, including taxes and insurance, as well as maintenance and repair costs.
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Your home must be in good shape. If your house does not meet the required property standards, the lender will tell you what repairs need to be made before you can get a reverse mortgage loan.
You must receive counseling from a HUD-approved reverse mortgage counseling agency to discuss your eligibility, the financial implications of the loan, and other alternatives.
The loan amount of a reverse mortgage gets based on the borrower's age, the value of the home, and the current interest rate.
The loan only needs to get repaid once the borrower moves out, sells the home, or dies. At that time, the loan balance gets paid off with proceeds from the sale of the house.
Most reverse mortgage loans are Home Equity Conversion Mortgages (HECMs). A HECM must be paid off when the last surviving borrower or Eligible Non-Borrowing Spouse:
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Dies
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Sells their home, or
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No longer lives in the home as their principal residence, meaning where they live for a majority of the year.
If you are away for more than 12 consecutive months in a healthcare facility such as a hospital, rehabilitation center, nursing home, or assisted living facility and there is no co-borrower living in the home, anyone living with you will have to move out unless they are able to pay back the loan or qualify as an Eligible Non-Borrowing Spouse.
There are several types of reverse mortgages, including:
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Home Equity Conversion Mortgages (HECMs). These are the most common types of reverse mortgages - you can use them for any purpose. They are federally insured by HUD, but that insurance doesn’t protect the homeowner. It guarantees the lender gets their money if you’re not able to repay the reverse mortgage. Typically, there aren’t income requirements to get a HECM. But lenders have to evaluate your finances and make sure you can both pay back the loan and keep up the house when they’re deciding whether to approve and close your loan. The lender may require you to set aside the money to pay things like property taxes, homeowner’s insurance, and flood insurance. HECMs give you bigger loan advances at a lower total cost than private loans do. Also, a HECM borrower generally can live in a nursing home or other medical facility for up to 12 consecutive months before they have to repay the loan.
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Single-Purpose Reverse Mortgages. Some state and local government agencies or nonprofits offer single-purpose reverse mortgages, which are the least expensive reverse mortgage option. You can use them for only the purpose that the lender specifies — for instance, home repairs or property taxes. Most homeowners with modest incomes can qualify for these loans.
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Proprietary (Private) Reverse Mortgages. These are offered by private lenders and may have a higher interest rate. If you own a home appraised at a high value (and you have a small mortgage), you may be able to get more money. But you will increase your debt and possibly use up your equity.
How To Get A Reverse Mortgage
How To Get A Reverse Mortgage
To get a reverse mortgage, you will need to follow the steps below. It is important to carefully consider the terms and conditions of a reverse mortgage loan before applying.
Steps To Get A Reverse Mortgage
You must be at least 62 years old and own your home outright or have a low mortgage balance that can be paid off with the proceeds from the reverse mortgage. You must also occupy the property as your primary residence.
Before applying for a reverse mortgage, you must meet with a HUD-approved housing counselor who can help you understand the terms and conditions of the loan, as well as any potential alternatives.
Visit HUD’s website for a list of counselors, or call the agency at 1-800-569-4287. Counseling agencies usually charge a fee for their services, often around $125, although it can be more. This fee can be paid from the loan you get, and you cannot be turned away if you can’t afford the fee.
Once you have completed the counseling session, you can start shopping around for a reverse mortgage lender.
- Compare the options, terms, and fees from various lenders. For example, while the mortgage insurance premium is usually the same from lender to lender, most loan costs — including origination fees, interest rates, closing costs, and servicing fees — vary among lenders.
- Confirm all upfront costs. Some reverse mortgages may be more expensive than traditional home loans, especially for things you pay upfront, like closing costs and origination fees. That’s important to consider if you plan to stay in your home for just a short time or to borrow a small amount.
- Know whether the offer is for a fixed or a variable interest rate. Most reverse mortgages have variable rates (that change depending on the market) and interest is added onto the balance you owe each month. That means the amount you owe grows as the interest on your loan adds up over time. Reverse mortgages with variable rates tend to give you more options on how you get your money but you run the risk that the rate could go up.
You will need to provide your lender with your personal information, as well as information about your property, including its value and any outstanding mortgages. Undergo a financial assessment. To determine your eligibility for the loan, the lender will assess your income, credit history, and other financial factors.
If you are approved for the loan, you will receive a loan estimate that outlines the terms and costs of the loan. Close on the loan. You will need to sign a series of legal documents, including the loan agreement and a mortgage or deed of trust. Once the loan is closed, you will receive the proceeds from the loan, either as a lump sum, a line of credit, or monthly payments.
Other Issues To Consider
Other Issues To Consider
These are other issues related to reverse mortgages that you may consider.
Other Issues To Consider
With most reverse mortgages, you have at least three business days after closing to cancel the deal for any reason, without penalty. This is known as your right of “rescission.”
To cancel:
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You must notify the lender in writing within three business days (including Saturdays but NOT Sundays or legal public holidays).
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Send your letter by certified mail and get a return receipt. That will let you document what the lender got, and when.
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Keep copies of your letter and the supporting documents — including any letters you send to and get from the lender.
After you cancel, the security interest in your home is no longer valid, and you are not responsible for any amount of the credit. The lender has 20 days to return any money you’ve paid for the financing and take the actions needed to terminate the security interest on your home. If you got money or property from the creditor, you must offer to return it after they release your security interest and they return any money you paid.
Before taking out a reverse mortgage, make sure you understand this type of loan. You may want to look at other borrowing and housing options, such as:
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Home Equity Options: A home equity loan (HEL) or a home equity line of credit (HELOC) might be a cheaper way to borrow cash against your home’s equity. However, these loans carry their risks and usually have monthly payments. Qualifying for these loans also depends on your income and credit.
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Refinancing: Depending on interest rates, refinancing your current mortgage with a new traditional mortgage could lower your monthly mortgage payments. Pay attention to the length of time you’ll have to repay your new mortgage, as it can affect your retirement plans. For example, taking on a new 30-year mortgage when nearing retirement could become a hardship later. Consider choosing a shorter-term mortgage, such as a 10- or 15-year loan.
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Downsizing: Consider selling your home and downsizing and buying a more affordable home. This could reduce your overall monthly living expenses.
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Lowering Your Expenses: There are state and local programs that may help with utilities and fuel payments as well as home repairs. Some localities also have programs to help with property taxes: check with your parish tax office.
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Reverse Mortgage |
Home Equity Loan (HEC) |
Home Equity Lines Of Credit (HELOC) |
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What is it? |
An amount you borrow, based on the equity in your home |
A fixed amount you borrow for a fixed amount of time, secured by your home |
A revolving line of credit, secured by your home |
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How do I get the money? |
Can be a lump sum, monthly payments, or a combination |
Typically can get all the money at once up-front |
Generally can draw funds as needed (like a credit card) |
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Age requirement |
Must be at least 62 |
None. You cannot legally commit to a mortgage until you’re 18, unless you have a co-signer |
None. You cannot legally commit to a mortgage until you’re 18, unless you have a co-signer |
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Other requirements |
Must own home outright or have small mortgage |
Usually must have at least 20% equity in home |
Usually must have at least 20% equity in home |
Borrowers are responsible for costs like property taxes, homeowners insurance, and home maintenance in a reverse mortgage. The borrower must keep the home in good condition and pay all property taxes, insurance, and other related expenses during the life of the loan.
Reverse mortgage loans typically must be repaid either when you move out of the home or when you die. However, you may not need to immediately pay it back if you are away from your home for more than 12 consecutive months in a healthcare facility or have a co-borrower or Eligible Non-Borrowing Spouse living in the home.
If your spouse or person living with you is a co-borrower
If you move out of your home for any reason ─ such as to live in a nursing home, or downsize to a smaller house ─ and your spouse or the person living with you is a co-borrower on the reverse mortgage loan, they can stay in the home and continue to receive loan disbursements as long as they fulfill the ongoing obligations of the reverse mortgage.
If your spouse or person living with you isn’t a co-borrower
If your spouse or partner is not a co-borrower and you move someplace else for the majority of the year, the reverse mortgage loan will need to be paid back. The most common way to pay back a reverse mortgage is by selling the home, in which case your spouse or partner will have to move. If you are away from your home and in a healthcare facility such as a hospital, assisted living, nursing home, or rehabilitation center for more than 12 consecutive months, your non-borrowing spouse may be able to stay in the home without paying off the loan, depending on when you took out (“originated”) the loan. and whether they qualify as an Eligible Non-Borrowing Spouse under HUD’s rules.
Reverse mortgage loans typically must be repaid when you die. What happens to the reverse mortgage will depend on several factors, including:
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Whether you have a co-borrower on the reverse mortgage loan,
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When you took out the reverse mortgage, and
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Whether you were married when the loan documents were signed and continued to be married up until your death.
If there’s a co-borrower on the loan
When there is a co-borrower on the loan, both you and the co-borrower receive the benefits of the loan and are responsible for meeting the obligations of the loan. If one borrower dies, the co-borrower will be able to remain in the home and receive loan payments as long as they meet the obligations of the reverse mortgage loan.
If your spouse is not a co-borrower
Your non-borrowing spouse may stay in the home if they pay off the loan. They may also be able to stay in the home without paying off the loan, depending on when the loan was originated (meaning when it was taken out) and whether they qualify as an Eligible Non-Borrowing Spouse under HUD’s rules. An Eligible Non-Borrowing Spouse will not get any money from the reverse mortgage. The process of qualifying to be an Eligible Non-Borrowing Spouse may be difficult. Your non-borrowing spouse may want to get help from an attorney or a HUD-approved housing counseling agency.
If your heirs want to purchase the house that is subject to a reverse mortgage, they have several options:
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Pay off the loan: Your heirs can pay off the balance of the reverse mortgage loan to own the property outright. They can do this by refinancing the reverse mortgage into a traditional mortgage or by using other funds to pay off the balance.
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Sell the property: If your heirs do not want to keep the property, they can sell it and use the proceeds to pay off the reverse mortgage loan. If the sale proceeds are not enough to pay off the entire loan, the lender will accept the proceeds as full satisfaction of the debt.
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Keep the property and refinance: If your heirs want to keep the property, they can refinance the reverse mortgage into a traditional mortgage. This will require them to qualify for a new loan based on their income and creditworthiness.
It's important to note that your heirs will have to act quickly if they want to keep the property. They will have a limited amount of time to repay the loan or sell the property after your passing, and failure to do so may result in foreclosure.