What is a Reverse Mortgage Loan?
You may have heard about a lending option called a reverse mortgage loan for homeowners. If you are not familiar with it, a reverse mortgage is a loan for people at least 62 years old that converts a portion of their home equity into cash. The proceeds from a reverse mortgage can be used to pay for unexpected expenses, such as nursing home costs or long-term care. It could also provide you with additional cash flow for all the expenses you have. As long as all loan terms are met, the loan does not require repayment until the last surviving borrower permanently moves out of the home, or until the last person on title passes away. A reverse mortgage is a non-recourse loan that you do not have to pay monthly mortgage payments on, except for taxes and insurance and maintain the home.
Most, but not all, reverse mortgages today are federally insured through the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) Program. This blog talks about HECM loans only
- Generally, it will not affect Social Security & Medicare*
- You still can sell your home at any time, because the deed stays in your name
- You’ll never owe more than what the house is worth**
- Access a growing line of credit (applies to unused funds)
- Bridge the Medicare age gap from age 62 to 65
- Purchase a retirement home, investment property, or right-size home to increase monthly cash flow and free up funds for investments. (Not available in all areas)
- The property must be a single-family home, 2- to a 4-unit dwelling or FHA-approved condo
- Must meet minimal credit and property requirements
- Must receive reverse mortgage counseling from a HUD-approved counseling agency
- Must not be delinquent on any federal debt
- Must be a homeowner and either own home outright or have significant equity; must live in the house as the primary residence (live there 6+ months per year)
- One borrower must be 62 or better except in Texas, where both spouses need to be at least 62.
- Maximum allowed HECM FHA insured home value is $765,600 in 2020
For most people, your home is the most significant asset you have in retirement. You must take the time to understand the facts about a Reverse Mortgage loan.
What a Reverse Mortgage Is:
A Loan that Converts Equity to Cash for Many Different Uses:
A reverse mortgage can enhance your cash flow and/ or pay off (refinances) your current mortgage when mortgage payments are no longer as easy to make, the primary reason to use a reverse mortgage should be proactive, not reactive to a cash flow problem. When things are good, it is a great time to get a life preserver in case the economic waters get rough later in life.
Use for Lengthening or Increasing Retirement Cash Flow:
Create memories that you will be glad to have at the sunset of life. It is sad when folks sit at home on top of thousands of dollars in equity and miss vacations, grandchildren’s college graduations, or even a dinner out because the budget is too tight. No well-meaning child would ever ask you to pinch pennies so they could have a more substantial home equity inheritance when you pass away. They would rather have you enjoy life with them. Just ask them!
Opportunities that Need Cash NOW*:
In any rough economic times, there are many things that you can take advantage of if you have cash. You can purchase a vacation home in Arizona or a condo in Florida when you see below market prices! You could help a grandchild save their home from foreclosure or help them with college as costs soar over $20,000 per year at public universities. Think about it – if you had an extra $100,000 in your hand today, whom could you give it to, or what else could you do with it? With your wisdom and experience, we know you can think of lots of options.
Legacy for Charity or the Next Generation*:
If you work with a professional financial advisor in the life insurance industry, you may find there are many products designed for those with excess cash, including some that may accomplish more than a paid-off house could by itself. Talk to your financial advisor about products that may be available to you and your specific situation.
Using the loan proceeds from a reverse mortgage loan can potentially help all of your investments last longer. Talk to your financial advisor about how to incorporate this loan into your overall financial plan.
Why A Reverse Mortgage Might Be Right For You.
What Are The Payment Options For A Reverse Mortgage Loan?
There are a variety of options, including a lump sum, a line of credit, or a monthly cash flow payment such as tenure or term payment plan. You can switch between payment options at any time for a small one-time fee, and you could receive additional cash at a later date if you limit the first year’s cash payout.
How Do I Pay Back A Reverse Mortgage Loan?
Monthly payments are optional with a reverse mortgage. Housing expenses must continue to be paid, such as property taxes and insurance (and homeowner association fees, if applicable), and home must be maintained. The remaining balance is required to be paid back when you permanently move out of the house with interest agreed upon in the beginning. The loan will be paid back by the equity in the home, which may increase over time. If it does not, the reverse mortgage is insured by the Federal Housing Administration (FHA), and they will be responsible for the portion of the pay-off that exceeds the value of the house when the loan is repaid. You will not owe more than the value of your home, as long as you abide by the loan terms. Your heirs will have 6 months with two 90-day optional extensions to decide what they want to do. Your heirs are still entitled to the remaining equity balance, if any, after the loan has been paid off. If your heirs want to purchase the home, they can by paying 95% of the appraised value or paying off the loan balance, whichever is less. They can also choose to refinance the home into their name or walk away if the property is upside down.
What Is The Difference Between A Reverse Mortgage Loan And A Home Equity Loan?
A Home Equity Loan is a loan that requires you to make monthly mortgage payments on the principal and interest. Sometimes they require a balloon payment, and you’re not guaranteed access to the line of credit (LOC) funds. A reverse mortgage loan is a non-recourse loan that you do not have to pay monthly mortgage payments on, except for taxes and insurance and maintain the home. As long as all loan terms are met, the loan cannot be canceled or frozen and guarantees access to any unused funds.
What If I Already Have A Mortgage On My Home?
There may still be a reverse mortgage option for you, after reviewing your unique situation; your reverse mortgage planner can let you know what your options are.
If you have questions about whether or not a reverse mortgage loan is right for you, it never hurts to do a little research or ask a local Reverse Mortgage Planner. It’s important to know all the facts and features of a loan before approaching a lender or a bank. The critical thing to remember is a reverse mortgage isn’t just used as a loan of last resort anymore.
*This is not tax or financial advice. Please consult your tax and/or financial advisor for your specific situation
** Some circumstances will cause the loan to mature and the balance to become due and payable. The borrower is still responsible for paying property taxes and insurance and maintaining the home: credit subject to age, property, and some limited debt qualifications. Program rates, fees, terms, and conditions are not available in all states and subject to change.