Reverse Mortgages

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What is a reverse mortgage?

A reverse mortgage is a loan with no payments due as long as you live in your home as the owner.  You can think of this as a balloon payment due when the home is sold either before or after your death or the death of your spouse.  A  reverse mortgage allows you to borrow against the equity in your home.  Generally, the loan can be taken as a lump sum, a stream of automatic monthly payments, a growing line of credit or a combination of all three.  

There are currently three types of reverse mortgages:

1. The most popular is the HUD's HECM (Home Equity Conversion Mortgage).  This is a HUD sponsored program insured by the FHA (The Federal Housing Administration which is part of HUD).  HUD is a department of the federal government. 

   HUD's reverse mortgage program collects funds from insurance premiums charged to borrowers. Senior citizens are charged 2 percent of the home's value as an up-front payment plus one-half percent on the loan balance each year. These amounts are usually paid by the lender and charged to the borrower's principal balance.

   FHA's reverse mortgage insurance makes HUD's program less expensive to borrowers than the smaller reverse mortgage programs run by private lenders without FHA insurance.  The federal government determines the interest rate for HUD Reverse Mortgages. This means that no matter where you go for your Reverse Mortgage, the rate will be exactly the same. 

    

2. The Homekeeper reverse mortgage from Fannie Mae also includes a maximum lending limit, but does not offer growing credit limits. This reverse mortgage is guaranteed by Fannie Mae, and often comes with lower closing costs than HUD reverse mortgages.  For more information, visit: Fannie Mae. 

    

3. The Private Cash account reverse mortgage is usually reserved for homes worth over $500,000. This type of reverse mortgage offers a growing credit line, flexible payment options, and often comes with higher closing costs.

If you are interested in a reverse mortgage, beware of scam artists that charge thousands of dollars for information that is free from HUD!

Requirements:

You must be at least 62 years old and own your own home.  The property must be the principal residence of at least one of the home owners.  The property must be owned free-and-clear, or if there is debt on the property -- whether a mortgage, home equity loan, tax lien, or any other debt on the property -- it must be low enough to be paid off at closing, typically from the reverse mortgage proceeds.  The home must meet HUD minimum property standards.  If the property is held in trust, the trust must be revocable and the borrower must be the trustee.

The loan is due when  you no longer occupy the property as your principal residence, or if you fail to comply with the loan agreement.  When the loan is due, it must be repaid in one payment.  Their is no requirement that the property be sold, only that the loan be repaid.  During the course of the loan, optional payments are at the discretion of the borrower(s).

The federal government requires every reverse mortgage borrower to participate in a free consumer education and counseling session by a HUD-approved HECM counselor.

Section 255 of the National Housing Act, which governs the HECM program, limits the aggregate number of outstanding HECMs to 250,000. Conceivably, the cap could be reached in the next 12-24 months. Efforts are currently underway to remove or expand the cap on the number of HECM loans that can be issued.

What factors determine the amount that can be borrowed?

• The age of the homeowner(s)

• The current interest rate

• Lesser of appraised value or the FHA insurance limit

• The county in which the property is located

You can also use this handy Reverse Mortgage Calculator to help you see if you qualify.

Is a reverse mortgage right for you?

The ideal candidate for a reverse mortgage are seniors who are asset rich but cash poor, that don't want to sell their home, that need to increase their income and favors a better standard of living now over leaving a legacy to their heirs.  

The biggest drawback with reverse mortgages are the high upfront costs. Some seniors may want to consider other options to tap their home equity, particularly if they do not think they will remain in the home for at least five years.

  Other Options:

• A home equity line of credit (HELOC) requiring interest-only payments for 10 years can be used.  The drawback is that, unlike a reverse mortgage, the borrower must make a monthly (interest-only) payment to the lender.  These loans typically have very low (or zero) upfront costs.  
• Intra-family loan or sale-leaseback.
• Selling and moving to a less expensive dwelling or location. However, when selling the homeowner incurs high closing costs including, typically, a 6% commission, moving costs, and purchase costs on the new dwelling.  There is a coordinated government program called "Aging in Place" that strives to assist the homeowner in staying in their home and neighborhood.

What are some reasons to obtain a reverse mortgage?

• To create a tax-free source of income

• To help finance retirement

• As a gifting strategy to reduce potential estate taxes

• To pay for in-home care

• To pay for insurance premiums

• To pay for property taxes

• To pay for home repairs or improvements

• To cover medical expenses

• To provide for the financial assistance of others

• To avoid government-assisted programs such as Medicaid or MediCal

The Pro's:

• No monthly payments

• You are guaranteed a tax-free stream of income for as long as you live in your home regardless of your age.

• The loan balance can never be greater than the home's fair market value (guaranteed by  the federal government).  If the sales proceeds are insufficient to pay the amount owed, HUD will pay the lender the amount of the shortfall. The Federal Housing Administration, which is part of HUD, collects an insurance premium from all borrowers to provide this coverage.

• Loan proceeds are not considered income by the government.  They will not affect Social Security or Medicare benefits because these programs are not based on financial need.

• You can obtain an immediate cash advance by tapping into your loan for a lump-sum payment.

• Adjustable payment options in the future to meet your changing circumstances.

• The older you are, the more money you can qualify for based on the age of the youngest borrower.

• As long as you live in your home, you do not have to sell it.  You retain sole ownership of the property, and the the reverse mortgage does not prevent your heirs from inheriting it.

• Your employment, credit or income are not a factor that will determine your eligibility to qualify.

• You have the option to repay your loan or make optional payments at any time.

• Peace of mind knowing you and your heirs have no personal liability for the repayment of the loan since it is secured solely by your home.

• You retain ownership of your home that can be passed to heirs.  Your heirs are given the choice of paying the loan to keep the home or selling the home to pay the loan.

The Con's:

• Pre-defined HUD requirements limit the amount of money that can be borrow on HUD's Home Equity Conversion Martgages. 

• The longer you live, the less equity you will have in your home.

• Variable interest rates (HUD's Home Equity Conversion Mortgage rates are tied to the one-year U.S. treasury rate and have a 10% cap).

• Interest is not tax deductible until property is sold.

• Your loan balance compounds exponentially and must be paid when you no longer occupy the home as your principal residence.

• Interest rates are variable and traditionally higher than other types of mortgage loans.

• Higher fees than other types of mortgage loans.

• You cannot write off the interest until the loan is paid off.

• You must be age 62 or older.

• If you hold property with your children in joint tenancy, they must be at least age 62 or older.

• The younger you are, the less money you can qualify  for and it is based on the age of the youngest borrower.

• The property must be a principal residence of at least one of the homeowners.

• For HUD Home Equity Conversion Mortgages, the home must meet HUD minimum property standards - repairs may be required but can be made after closing the loan.

Caution:

• Always deal with a reputable lender.  Interview multiple lenders and compare costs.  If you or someone you know has every had a negative experience with a reverse mortgage or reverse mortgage lender, please let us know so we can protect others in the future. 

• To report fraud or abuse in the reverse mortgage program, contact your local homeownership center.

• As with any loan, if you fail to comply with the loan agreement (e.g. you must pay your property taxes, hazard insurance, and keep the property from falling into disrepair), repayment will be due.  Failure to comply with the terms of your loan may result in negative consequences - Read your contract and know your obligations.

Obtaining a Reverse Mortgage:

Disclosure you should receive: Total estimated cost.  Use this to compare offers.  Submitting an application does not obligate you to take the loan.  Nothing is final until you have signed the closing document and the loan has funded.  If your home is held in trust, the lender may require you to temporarily re-title your property.  However, some lenders to not.  Find a HUD approved lender: HUD-approved Lenders.

Financial Planning Ideas:

Disclaimer:  Always consult your personal certified financial planner, tax advisor and/or attorney before making any financial decisions.

• Reverse mortgages create a tax-free stream of income.

• Paying just the interest will substantially reduce the compounding effect of the loan.

• There may be some strategies to help reduce future estate tax liabilities.

• Their may be some benefits that address Medicaid/MediCal qualifications.

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