Are you considering a reverse mortgage but have heard too many horror stories? We understand they can be confusing. For National Homeownership Month, we’re here to break down what reverse mortgages are and if they may be right for you.
What is a reverse mortgage?
A reverse mortgage allows you to draw funds from your home’s equity. The loan increases as you receive payments. Reverse mortgages must be repaid but only when you no longer occupy your home.
The amount you are able to borrow is determined by your home’s value and your current age. Reverse mortgages can be used to supplement your retirement income and ensure you are able to remain in your home for as long as you live.
There are two types of reverse mortgages: a home equity conversion mortgage (HECM) and a proprietary reverse mortgage. HECM’s are created and regulated by the U.S. Department of Housing and Urban Development (HUD). Proprietary reverse mortgages are offered and privately insured by mortgage companies and are not subject to the same rules and regulations as a HECM mortgage.
HECM loans are the most commonly available type of reverse mortgage. Below are answers to a few FAQs.
How do I qualify?
In order to qualify for a HECM you must:
- Be at least 62 years of age
- Own your home outright or have a low enough mortgage balance that it can be easily paid off, and
- Have the financial resources to pay for ongoing costs like property taxes, insurance, utilities, and necessary repairs. Your home must also serve as your primary residence for at least six months of each year.
Before reviewing your application a lender must provide you with a list of HUD approved counselors to advise you on reverse mortgages. The counselor will provide you with important information designed to ensure you understand the loan terms and limits. The counselors will take an estimate of your home’s value and can show you how a reverse mortgage might be structured based on the way you choose to receive your payments, your age, and current interest rates. Your chosen lender cannot legally review you for a HECM loan until 7 days after this required counseling; this is to give you additional time to weigh the pros and cons of a reverse mortgage.
How will I receive my payments?
You have six options, detailed below. None of these need to be repaid as long as you live and continue to reside in your home as your principle residence.
Here are the payment plans:
Tenure plans provide you with equal monthly payments as long as you live and continue to occupy your home. These payments are determined by your age and life expectancy because you will continue to receive them even if the available equity in your home is exhausted and the loan exceeds the value of your home.
Term plans provide equal monthly payments for a fixed period of months. This is different from tenure plans because you choose how long you receive payments and the payments end after the term expires.
Line of Credit plans provide you with an amount you are able to borrow and you may make unscheduled withdrawals at any time until the line of credit is exhausted.
Modified Tenure plans are a combination of a line of credit and scheduled monthly payments that do not expire. You will have an amount to make unscheduled withdrawals along with a monthly payment that does not expire for as long as you live and reside in your home.
Modified Term plans are a combination of an available line of credit and monthly payments for the number of months and period of time you choose.
Single Disbursement Lump Sum is a single lump sum paid to you at closing.
No matter how you choose to receive your payments, the loan will not be paid back for as long as you live and reside in your home and keep up with your responsibilities as a borrower.
What are my responsibilities?
There are several conditions that must be met for all HECM mortgages in addition to the requirement that you not sell or transfer your home to a non-borrower. Once you agree to a reverse mortgage you’ll be expected to:
- The property must be your primary residence. This means that you must spend at least 6 months out of the year living in that property and your lender will regularly request proof of occupancy to verify this at least annually.
- Pay your property taxes and insurance on time. In some cases your lender may require you to have a set-aside fund or impound account as a condition of the HECM loan and your lender will automatically withhold necessary funds for this purpose.
- Maintain the property and keep it in good condition. The home is used as collateral and its value must be retained in order to cover the amount of the loan when the debt is repaid. You must also cover any dues and fees such as Homeowners Association fees as they are part of the maintenance of the property.
By continuing to meet these conditions, you ensure that the debt incurred from your HECM loan will not become due and payable for as long as you live and reside in your home.
What about my heirs?
Remember, it is a home equity conversion mortgage and that means you are getting a loan. Any withdrawals made must be repaid once you are no longer living or have decided to leave your home. There will be less equity available but any excess funds from the sale of your home will still belong to you and your heirs. However, a reverse mortgage cannot be modified and must be paid back in full when it becomes due. Your heirs will need to be prepared to repay the loan in its entirety if they intend to retain ownership of the property.
As mentioned above, it is possible to borrow more than your home is worth. If you have chosen your payments as part of a tenure plan and have exceeded the available equity in your home, your heirs WILL NOT be responsible for the excess borrowed. With a HECM loan, the difference is covered by HUD in all but the most extreme cases.
Is a reverse mortgage right for me?
There is a lot to think about when it comes to reverse mortgages. By treating a reverse mortgage as you would any major financial decision, you’ll be able to decide what’s best for your retirement plan and for your heirs. For more information, visit the U.S. Department of Housing and Urban Development.