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Reverse Mortgages: A Way to Remain at Home Longer
Reverse mortgages are mortgage products often directed at older individuals with equity in their homes who want to supplement their income. They can also be a way for senior homeowners to stay in their home as long as possible.
Private companies or lenders approved by the Federal Housing Administration (FHA) can offer reverse mortgages. These mortgages will vary on a multitude of factors and terms. If you are considering a reverse mortgage, consider some of the following points.How Do Reverse Mortgages Work?
A reverse mortgage is similar to a traditional mortgage loan in the sense that a lender will place a lien against your home in exchange for giving you a certain amount of money. Where a homeowner has equity and is at least 62 years of age, a reverse mortgage can allow them to “cash out” this equity.
However, all existing debt against your property has to be paid off and cleared before you can receive any money. So, if your property is worth $500,000 with a $100,000 mortgage balance, and the reverse mortgage lender agrees to loan you $400,000, the most you can receive is $300,000.
A homeowner will not be required to make monthly mortgage payments, but must maintain taxes and insurance and upkeep the home. During this time, the mortgage will accrue interest and other fees. This increased balance will be recovered by the mortgage company upon the borrower’s death, usually through the sale of the home by their estate after they pass away.
In addition, per the Consumer Financial Protection Bureau, if your loan balance is more than the value of your home, your estate won’t have to pay more than 95 percent of the appraised value. The difference is covered by mortgage insurance.Reverse Mortgages and Aging in Place
Many reverse mortgage lenders advertise that reverse mortgages permit house-rich but cash-poor seniors to use their housing equity to, for example, pay for home care while they remain in the home or for nursing home care later on. The loans can be repaid once the last surviving borrower dies, sells the home, or permanently moves out.
(Warning: If both spouses are not on the reverse mortgage deed and the spouse on the deed dies first, the surviving spouse would be required to repay the mortgage loan in full or face eviction.)
The homeowner will remain the titled owner. However, upon the passing of one or both spouses, or default in other mortgage terms (failure to pay property taxes, insurance, etc.), the mortgage lender is usually entitled to accelerate the mortgage and be repaid. Lenders may take steps to foreclose on the property if they do not receive this payment.How Much Money Can You Get With a Reverse Mortgage?
In a reverse mortgage, the amount of money a homeowner may receive is mainly based on the house’s value, it meeting various property requirements, the age of the borrower, their ability to maintain property taxes and insurance, and current interest rates. In addition, if you seek a reverse mortgage through a federal program, you must not be delinquent on any federal debt.
The lower the interest rate and the older the borrower, the more that a person can usually borrow. To find out how much you can get for your house, use a reverse mortgage loan calculator.
Homeowners can usually get the money in one of three ways (or in any combination of the three):
- in a lump sum
- as a line of credit that can be drawn on at the borrower’s option, or
- in a series of regular payments, called a “reverse annuity mortgage.”
The most popular choice is the line of credit because it allows a borrower to decide when they need the money and how much (provided they are not in default). Moreover, no interest is charged on the untapped balance of the loan.What Can You Use the Money For?
Although it is often assumed that an older adult would want to use the funds from a reverse mortgage loan for health care, there are no restrictions — the funds can be used in any way. For instance, the loan could be used to pay back taxes, make house repairs, or retrofit a home to make it more accessible for a person with a disability.
Reverse Mortgage Programs
The most widely available reverse mortgage product — and the source of the largest cash advances — is the Home Equity Conversion Mortgage (HECM), the only reverse mortgage program insured by the FHA.
The HECM option is often viewed as the most desirable because it is regulated by the federal government and lenders must follow struct guidelines. For example, as of December 15, 2022, new protections are offered to borrowers with HECM mortgages who have been impacted by COVID-19 and fallen behind in property taxes.
However, the FHA sets a ceiling on the amount that can be borrowed against a single-family house, which is determined on a county-by-county basis. The HECM FHA mortgage limit on the amount a homeowner can borrow is $1,089,300 as of the calendar year 2023. Borrowers looking for a higher loan amount must look to the private reverse mortgage market, which imposes no loan limits.Costs of a Reverse Mortgage
As with any other mortgage transaction, there are fees and expenses. You can often pay for these costs by financing them and having them come out of the loan proceeds. While this means you don’t have to pay for these out of pocket, it does reduce how much you receive.
A lender must disclose these fees and charges to you ahead of time. Examples include:
- Mortgage insurance premiums — The initial premium is 2 percent. There is also an annual premium that is 0.5 percent of the unpaid mortgage balance.
- Third-party charges — This may include an appraisal, title costs, inspections, local recording fees, taxes, credit reports, and more.
- An origination fee — This is a fee charged by the lender for processing your loan. It is currently capped at $6,000.
- Servicing fees
Reverse mortgages are not right for everyone. For most reverse mortgages, you have three business days after the loan closing to cancel the deal for any reason, without penalty — as long as it is done in a certain manner.
However, before engaging in a reverse mortgage transaction, you should consult with an attorney in your area.