What is a reverse mortgage?

A Home Equity Conversion Mortgage (HECM), or "Reverse Mortgage" is a loan that allows homeowners who are age 62 or older to convert a portion of their home's equity into cash. A HECM is a reverse mortgage, which works much like a traditional mortgage, only in reverse. Instead of making payments each month, you are receiving money, and instead of paying down the loan balance, what you owe in a reverse mortgage rises over time. It rises because of the interest you are being charged and the fact that you're not making any payments to offset this interest.

How is a reverse mortagge different from a conventional mortgage?

Rather than making a payment to the lender each month, the lender can send you a loan advance each month if you choose. Unlike a conventional home equity loan, a reverse mortgage does not require any repayment of principal, interest or servicing fees as long as you live in your home. You may use the cash you obtain from a reverse mortgage for any purpose. With most home loans, if you fail to make your monthly repayments, you could lose your home. But with a reverse mortgage, you do not have any monthly repayments to make. So you cannot lose your home by failing to make them.

How do I qualify for a reverse mortgage?

In order to qualify for a reverse mortgage, all owners and co-owners of the home must be age 62 or older and at least one homeowner must reside in the home as their primary residence at least six months out of the year.

If you have any debt against your home, you must either pay it off before getting a reverse mortgage or use an immediate cash advance from the reverse mortgage to pay it off. If you do not pay off the debt beforehand, or do not qualify for a large enough immediate cash advance to do so, you cannot get a reverse mortgage.

Who can get a reverse mortgage?

You must own your home and all owners must be at least 62 years old. Your home must be your "principal residence" - which means you must live in it more than half the year. For a federally insured HECM, your home must be a single-family property, a two- to four-unit building, or a federally approved condominium or Planned-Unit Development (PUD). Reverse mortgage programs do not lend on cooperative apartments or mobile homes, although some "manufactured" homes may qualify if they are built on a permanent foundation, classed and taxed as real estate and meet other requirements.

How much cash can I get out of a reverse mortgage?

The amount of cash available to you depends on the age(s) of the owner(s), the home's value, current interest rates and the specific reverse mortgage program you choose. In general, the older you are and the lower the interest rate, will provide the most cash from a reverse mortgage.

How are funds from a reverse mortgage paid to me?

It is your choice and depends on the specific program you choose. You can:

  • Take all of the money up front as a lump sum of cash at closing.
  • Take a monthly cash advance for a specific number of years that you select or a guaranteed monthly payment for as long as you live in the house.
  • Choose a credit line that lets you select the timing and amount of the loan advances on a request basis, until the credit line is exhausted.
  • Choose any combination of immediate cash advance, credit line account and monthly cash advance.

You also will have the option of changing your payment plan type at any time for a fee not to exceed $20.00 if your needs change along the way.

What if I have an existing reverse mortgage?

A Home Equity Conversion Mortgage (HECM, or reverse mortgage) must be a first mortgage. If you have an existing mortgage, it must be paid off before closing or paid off at closing with funds you receive from the HECM. Any additional lien against your property must be either be paid off or subordinate to the HECM.

What are the costs associated with a reverse mortgage?

HECMs typically involve four types of costs: an origination fee, closing and other third-party costs, servicing fees and the mortgage insurance premium. With the exception of the mortgage insurance premium, many of these fees can vary from lender to lender. These costs are generally financed into your reverse mortgage loan at closing. Your lender must provide you with a Total Annual Loan Cost (TALC) disclosure prior to your loan closing.

How much interest will be charged when I take out a reverse mortgage?

Interest is charged on all money that you receive and on all loan costs that have been financed. You may select an interest rate that is fixed or that adjusts monthly or annually, although all lenders do not offer all options. Your lender must provide you with the index, the margin and the periodic and lifetime caps for adjustable interest rates.

If I change my mind, an I cancel a reverse mortgage?

After closing on a HECM loan, you have 3 days to cancel the mortgage if you choose. This is also known as the "rescission period", an important measure implemented to protect the consumer.

Do I have to repay a reverse mortgage?

When the loan becomes due and payable, you or your estate must pay back all of the cash advances, any fees or costs financed as part of the loan, and all interest that has been charged to date.

HECMs do not have to be repaid until the last surviving borrower has been unable to occupy the home for more than 12 consecutive months, dies, sells the home or permanently moves from the home. You may partially or fully repay the loan balance at any time. There are no prepayment penalties for a HECM.

If your home is sold to pay off the loan, you or your estate are not responsible for paying back more than the amount received from the sale of the home. This may occur if the home's value depreciates, if interest rates go up, or if the total payments made to you during the life of the loan exceed the value of the home.

What are my responsibilities once I receive a reverse mortgage?

A homeowner with a reverse mortgage has 3 main ongoing responsibilities:

  • You are required to make timely payments on your property taxes. Failure to do so could result in the loss of your home.
  • You are required to make timely payments of premiums towards your homeowner's insurance. Flood insurance is also required if the property is located in a flood zone. Failure to do so could result in the loss of your home.
  • Your property must be maintained in at least the condition that it was in when the reverse mortgage was taken out. Lenders may perform "drive-by" inspections. If problems are identified, you will be required to remedy them.

What are the pros and cons of getting a reverse mortgage?

The advantages of a reverse mortgage are that you'll be able to remain in the home and retain title of your home without having to make a monthly mortgage payment. There are no restrictions on what you do with the money. The funds you receive will not affect your Social Security or Medicare benefits, and if you choose to take monthly advances, the advances would not jeopardize your eligibility for any state or locally funded programs, such as SSI or Medicaid, as long as the balance in your bank account remains below their required limit on the last business day of the month. You don't have to pay income taxes on the money received, and you'll never have to pay back more than what your home is worth.

The disadvantages of getting a reverse mortgage are that all of the remaining equity in your home can be eaten up by your loan advances, the interest paid and the fees that are being added to your loan balance. This will mean that less equity will be available to you in the future should you need it for other purposes. Also the closing costs can be high and are usually most costly in the short term.

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