What is a Reverse Mortgage?
A reverse mortgage allows people over the age of 62 years to convert part of the equity they have in their home into tax free income without having to sell or take out a monthly conventional mortgage. It is called “reverse” because the home owner does not pay the lender on a monthly basis; the lender pays the home owner.
Basic Features of a Reverse Mortgage
ALL reverse mortgages, regardless of whether they are the government insured HECM (Home Equity Conversion Mortgage) or a conventional reverse mortgage, have common characteristics. Listed below is a brief description of these reverse mortgage features:
1. The borrower must be at least 62 years of age and own his/her/their home. Some conventional reverse mortgage offerings may differ in age requirements.
2. The home owner(s) never relinquishes ownership/title to the home. The reverse mortgage lender will never own the home, regardless of mitigating circumstances.
3. The home owner(s) must continue to pay all property taxes and insurance on the home while maintaining the property. If the home owner(s) cannot keep up the taxes and/or insurance on the property, a special set-aside in the reverse mortgage can be created.
4. Payback of the reverse mortgage loan happens when the home is permanently vacated as the primary residence. Either the home owner(s) or his/her/their heirs must either sell the home or pay the loan from private funding. If the property is sold for more than the amount due on reverse mortgage loan, the current heir/owner keeps the balance. If the home owner(s) is using the HECM, he/she/they can live outside of the home for up to 12 months.
5. The amount of the reverse mortgage loan that a home owner can receive is based on the age of the property owner(s), the value of the home, the interest rates and up-front costs. If you are receiving an HECM loan, county limits are taken into consideration. Whatever the form of reverse mortgage loan you are seeking, the older the home owner(s), the more funds he/she/they are eligible for.
6. All fees required for a reverse mortgage can be financed, or they can be paid out of the available reverse mortgage loan proceeds. Providing these options means that the home owner(s) will have little out-of-pocket expenses in obtaining the reverse mortgage. In most situations, the owner(s) are required to pay only for the appraisal, which is approximately $350.
7. The amount of the reverse mortgage loan balance grows each time each time funds are accessed from the line of credit or from a monthly payment. The lender of the reverse mortgage loan is charging interest to the home owner(s) on the outstanding balance as well as a monthly servicing fee.
8. Every reverse mortgage loan has a ‘non-recourse’ feature. That means that the total amount owed can never exceed the appraised value of the home. Should the appraised value of the home be lower than the reverse mortgage loan, the government (HECM) or the lender (conventional reverse mortgage loan) will absorb the loss.
Today’s reverse mortgage loans have many safeguards for seniors applying, whether it is through the HECM or a conventional reverse mortgage.
1. Independent Counseling is required before processing of reverse mortgage loans.
2. Standard & Capped Interest Rates are set in place, regardless of whether the reverse loan is HECM or conventional.
3. Limitation on Fees means capped origination fees. Little to no expenses to owner(s) at closing.
4. Advance Disclosure under the FHA HECM. That means that the total annual loan cost (TALC) is disclosed.
5. No Maturity Date means that a reverse mortgage loan will not come due during the home owner(s) lifetime. Reverse mortgage home loans are hugely safer than convention mortgages.
6. No Pre-payment Penalty for early payoff of the loan if FHA HECM. Some conventional reverse mortgages might require such a penalty.
7. No Penalty for Canceling the Loan
8. Asset Protection is provided due to the “non-recourse” feature, mentioned under Basics above.
9. No Shared Appreciation means no reverse mortgage has ‘equity sharing’ or ‘shared appreciation.’