The concept of a reverse mortgage is perhaps a bit counterintuitive. It can come with misconceptions–most founded by inaccurate information. Is a Reverse Mortgage for you? That’s really a question for your loan officer prior to counseling or the HUD counselor. We hope to shed a little light into the process and give you an idea about the benefits that can come with a Reverse Mortgage.
Similar but Different
A Reverse Mortgage turns a homeowner’s equity into cash without the need to refinance the property or obtain a conventional home equity line of credit (HELOC). A HELOC is a line of credit that uses the home as collateral and if used, requires monthly payments the homeowners must make. Similar but different, is a cash out refinance. In a cash-out refinance, homeowners can refinance an existing mortgage and take out some extra cash and use it in whatever way they wish. Still, in both instances, it’s a new loan with new monthly payments. A HELOC and cash out refinance are loan types for those who are “house rich” but maybe just a bit “cash poor” but can still afford to make monthly payments.
A Reverse Mortgage doesn’t require monthly mortgage payments. Typically, the only time a payment is made is when the borrower(s) ultimately leave the property, and the home is no longer the primary residence. They can always choose to make monthly payments of whatever amount they want, a little or a lot, but that is a choice, not a requirement. The funds from a Reverse Mortgage can be accessed through taking a lump sum, a line of credit or monthly payments for as long as the borrower(s) live in the home. The monthly installments can last the life of the loan or for a predetermined number of months, all the borrower’s choice. FHA also allows a combination of all 3, line of credit, lump sum, and monthly payments.
Here are the basic eligibility requirements for a Reverse Mortgage:
- The borrower(s) must be at least 62 years of age
- The property is the borrower(s) primary residence
- The property must have sufficient equity
- The borrower(s) must attend a counseling session with a Reverse Mortgage counselor
- The borrower(s) must be able to demonstrate a reasonable credit history
- The borrower(s) must be able to demonstrate they have sufficient income to cover property taxes and insurance
The last 2 requirements were added in 2015; borrowers must be able to keep their property taxes paid and the collateral insured as well as show responsible credit history. If that seems questionable, there is an option to establish a lifetime set aside (LESA) to ensure those charges are paid and the consumer is protected. Lenders will review the borrower’s monthly required obligations and compare that with the amount of disposable income as well as make certain the Reverse Mortgage is a sustainable solution.
Unlike regular mortgages, there is no “debt to income” requirement with a Reverse Mortgage, so it is substantially easier to qualify. If there is an existing mortgage on the property, proceeds from the reverse are used to pay off the mortgage and eliminate existing monthly mortgage payments.
Reverse Mortgage loan amounts will vary based upon the age of the youngest borrower on the application. Generally speaking, the older the borrower, the more money can be issued. The property will also be appraised just like with any other FHA mortgage. The age of the borrower(s) and the amount of equity in the property are the two main line items a reverse lender will evaluate per a formula set down by the FHA. Visit our Reverse Mortgage calculator to get a rough idea of how much you will qualify for.
The “Two-Thumbs-Up” for Reverse Mortgages
The most compelling reason to get a Reverse Mortgage is to turn equity into tax-free cash while still living in the property. Interest accrues on disbursed funds and is directly tied to an index, such as a 1 Year or Monthly London Interbank Offered Rate (LIBOR), plus a margin (typically 2-3%) and is only paid at a maturity event a.k.a. the sale of the property or six months after the homeowners leave the home. And, the proceeds are tax-free! Yet, please remember you still have to pay property taxes and keep your home insured.
A Reverse Mortgage doesn’t “sell” the property to the lender. The homeowners remain on the title and still own the home. A reverse gets rid of an existing mortgage, therefore eliminating monthly mortgage payments. Heirs are not held liable to pay off the full reverse loan balance should the payoff exceed the value of the home and any remaining equity will flow to the heirs just like any other mortgage.
But, Before The Reverse gets Best Picture…
There really aren’t too many negatives with a reverse but there are some considerations. The value of the inheritance can fall as the reverse needs to be paid off and loan fees may be a bit higher compared to a regular mortgage. Some lenders will cover some or all of those fees, and those that are not paid by the lender are deducted at the closing table. When accessing home equity, it’s important to understand all the financial consequences, and these consequences will be reviewed during counseling, but it may also make sense to speak with your financial adviser to make sure you understand the impact a Reverse Mortgage can have on your estate.
Overall, a Reverse Mortgage is a great option used to access your home equity without having to sell your home, and without any monthly mortgage payments. If you’re curious or know someone who this might benefit, it’s time to call a Reverse Mortgage lender today. And remember, like a friendly movie review from your sister, all opinions are valuable, they just might not be the most accurate or applicable. In other words, see that movie you think you might like, or in this case, look into a reverse, it just might be what you are looking for.
*The above advertisement has not been approved or endorsed by FHA or any other government agency. Please also note all pricing, percentages and fees are subject to change and are based on personal circumstances. The use of hypothetical statements are meant to illustrate possible outcomes and are not intended to be a statement of facts.*