Reverse Mortgage Basics
What is a reverse mortgage?
A reverse mortgage is a home-secured loan that allows older-adult homeowners to convert a percentage of the equity in their home into cash, fixed monthly advances, or a line of credit — and defer repayment of the loan so long as they live in the home and pay the property charges, like taxes and insurance.
How does a reverse mortgage work?
The lender pays you an advance on a percentage of your home equity. There are no required monthly principal or interest mortgage payments (you must pay the property charges, like taxes and insurance). The loan typically becomes due and payable when the last surviving borrower permanently moves out of the home or passes away. At loan maturity, the sale of the home will always satisfy the loan. Learn more.
Why would someone get a reverse mortgage?
Reverse mortgages are being used by a full spectrum of older-adult borrowers, ranging from those who desperately need one, to those who want one for lifestyle enhancement or financial planning. Common uses are to refinance an existing mortgage, increase cash flow, fund long-term care, and divide assets in a divorce. Learn more.
What are the advantages and disadvantages of reverse mortgages?
There are many advantages of a reverse mortgage, like its flexible repayment feature and non-recourse feature. There are also potential downsides, such as the unpaid reverse mortgage loan balance grows over time because interest and fees get tacked.
What are the types of reverse mortgages?
The three main types of reverse mortgages are:
- The federally insured Home Equity Conversion Mortgages (HECM)
- Proprietary reverse mortgages (i.e., Jumbo Reverse Mortgages)
- Home Equity Conversion Mortgage for Purchase (H4P)
What are the benefits of a reverse mortgage?
- Tax free cash from loan proceeds*
- Increased discretionary cash flow
- Can sell YOUR home at any time
- Keep The Title To Your Home
- Basic Credit & Income Qualifications
- Loan Proceeds from Equity 30-70% are Usually Tax Free*
- Does NOT Require Repayment Until The Last Living Borrower Permanently Leaves The Home
- Never Owe More Than Your Home Value – With FHA Reverse Mortgage**
- Able To Purchase A Home For 30-70% Down Of New Residence Sale Price***
*This advertisement is not tax advice. Please consult a tax advisor for your specific situation.
**There are some circumstances that will cause the loan to mature and the balance to become due and payable. Borrower is still responsible for paying property taxes, insurance and maintenance of home. Credit is 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.
*** The required down payment on your new home is determined on a number of factors, including your age (or eligible non-borrowing spouse’s age, if applicable); current interest rates; and the lesser of the home’s appraised value or purchase price.
What are reverse mortgage eligibility requirements?
- Borrower(s) must be 62 years or older
- Must be homeowner and either own home outright or have significant equity; must live in home as primary residence (live there 6+ months per year)
- Property must be a single-family home, 2- to 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
What basic responsibilities will you continue to have after you get a reverse mortgage?
The homeowner remains responsible for the payment of annual property taxes and homeowner’s insurance as well as basic upkeep of the property.
How do you get a reverse mortgage?
Home Equity Conversion Mortgages (or HECMS, commonly called reverse mortgages) are only available through an FHA-approved lender. Fairway Independent Mortgage Corporation is one such FHA-approved lender you can choose to work with, or you can also search online for FHA-approved lenders or ask a HECM counselor for a list of them.
Is a reverse mortgage a scam?
No, reverse mortgages are not a scam. Many people form opinions on reverse mortgages based on outdated information and myths about the way reverse mortgages work.
What could disqualify me from a reverse mortgage?
- Being younger than 62
- Your home not being an eligible property type
- Your home not being your primary residence
- Not having sufficient equity in your home
- Not meeting minimal credit and income requirements
- Being delinquent on federal debt
- Not attending a required financial counseling session
Learn more about reverse mortgage eligibility requirements.
Is a reverse mortgage a good idea?
A reverse mortgage has many benefits and could be a key part of helping you to create a more efficient retirement income strategy. That said, every older-adult homeowner has different needs, so working with a reverse mortgage professional is a great way to gauge if a reverse mortgage might be the right choice for you.
Can you get out of a reverse mortgage?
Yes, there are situations in which you can get out of a reverse mortgage. For instance, you could pay off your reverse mortgage loan balance in full; refinance your reverse mortgage into another reverse mortgage or a standard mortgage; or sell your home. When you sell your home, the reverse mortgage loan balance would become due and payable in full.
Are reverse mortgages increasing?
Reverse mortgages have become increasingly popular over the past few years, with new reverse mortgage (Home Equity Conversion Mortgage, or HECM) endorsements increasing 33% from 2019 to 2020 and increasing 17% from 2020 to 2021.
What if I live in Florida for half the year?
That’s fine, you just need to live in your primary residence for six months and a day.
What happens if you inherit a house with a reverse mortgage?
- If you DO want to keep the house, you can pay off or refinance the loan balance, or purchase the home with a short payoff of 95 percent of the appraised value of the home.
- If you DO NOT want to keep the home, you can sell the home and keep any profit. If the loan balance is more than the home is worth, you can sign a deed-in-lieu of foreclosure, which allows you to walk away from the home and not be stuck with a bill.
What happens when the homeowner dies with a reverse mortgage?
When the last surviving borrower dies, the reverse mortgage loan typically becomes due and payable. To learn about what options a Non-Borrowing Spouse who still resides in the house have, and options heirs who inherit the home have, read the article How Does a Reverse Mortgage Loan Work When You Die?
How does a reverse mortgage work in a divorce?
If one spouse wants the home, and one spouse wants to leave, taking out a reverse mortgage can provide the buyout for the departing spouse without disrupting either retirement plan. Learn more about how a reverse mortgage works in a divorce.
Will your heirs receive more or less after you pass away than they would without a reverse mortgage?
It depends on what you do with your overall finances. Some families will receive more by being more efficient with the use of their portfolio of assets; however again, because this is not financial advice, it is very important that you consult with your financial advisor to make the best use of a reverse mortgage for your specific situation.
Do I have to pay property taxes with a reverse mortgage?
Yes. The borrower is required to pay property charges, like taxes and insurance. The borrower can either pay the property charges directly — or a portion of the available loan proceeds can be earmarked for paying the borrower’s property charges over their expected lifetime (either released semi-annually to the borrower or the lender can pay the property charges directly).
What’s the interest rate on a reverse mortgage?
Reverse mortgage interest rates can vary by lender and whether you select a fixed or variable product. The variable interest rate is composed of two parts: an index and a lender margin (both are stated in the mortgage contract). Fairway uses the weekly average of the Constant Maturity Treasury (CMT) as the index. To find out what the current reverse mortgage interest rates are, please reach out to a Fairway retirement mortgage specialist.
What is the maximum amount for a reverse mortgage?
For Home Equity Conversion Mortgage (HECM) loan, there is a cap (called the Maximum Claim Amount, or MCA) on the home value that can be used to calculate the principal limit, or the amount of money available to the borrower. The MCA is the home’s appraised value up to the HECM loan limit, which is currently $970,800.
Can you sell a house with a reverse mortgage?
Yes, you own your home and can sell it at any time you choose. When you sell your home, the loan balance becomes due and payable, and you’ll need to satisfy the loan at that time.
What happens to a reverse mortgage when the property value increases?
Reverse mortgages are based on your home’s appraised property value when the loan is established and do not adjust over time based on swings in the home value. That said, a rising home value can benefit you in many other ways, such as potentially increased borrowing capacity if you decide to refinance the reverse mortgage into a new one.
How will inflation affect reverse mortgages?
A big component of inflation has been rising home values. A reverse mortgage, which allows for borrowing against home equity, can help older-adult homeowners who are feeling the pinch of inflation to increase cash flow and maintain a comfortable lifestyle in retirement.
How do you pay back a reverse mortgage?
When a maturity event occurs (e.g., the home is no longer the primary residence of at least one borrower or a non-borrowing spouse), the loan becomes due and payable, and the home is typically sold to repay the outstanding loan balance. Because reverse mortgages are non-recourse loans, the sale of the home after loan maturity will always satisfy the loan repayment obligation — neither the borrower nor their heirs will be personally liable for any balance deficiency.
Can you refinance a reverse mortgage?
Yes. You can refinance a Home Equity Conversion Mortgage (HECM, or reverse mortgage) loan – meaning pay off an existing HECM with a new HECM. There are many reasons to refinance a HECM, but the primary purposes are to 1) increase borrowing capacity and 2) reduce interest rate and accrual charges.
Does a reverse mortgage count as income?
Distributions from home equity, and consequently reverse mortgages, are generally not considered income. By drawing part of your monthly cash flow from home equity, as opposed to taxable sources like draws from a 401(k), you may be able to keep your adjusted gross income low*.
*This content does not constitute tax advice. Please consult a tax advisor regarding your specific situation.
If you took all of the money from the reverse mortgage in a lump sum and spent every bit of it, would you be able to go on living in your home?
Yes, your reverse mortgage will not become due until you pass away, sell your home, or are no longer living in the home. If you use all of the available proceeds, you would not have any more money available and interest would accrue until one of the three events referenced above occurred.
What does Suze Orman say about reverse mortgages?
Suze Orman has viewed reverse mortgages as a viable option for retirees who need more cash flow. In the article “Suze Orman Says Yes to Reverse Mortgages,” you can read about her response to her viewer’s questions regarding drawing down on investments vs. using a reverse mortgage to fund the purchase of large ticket items.
What does Dave Ramsey say about reverse mortgages?
Dave Ramsey and many others have built a career on convincing others to be debt free. And that’s often a noble goal. But there are many people who have benefitted from strategically borrowing money, including reverse mortgage loan borrowers. Check out this NASDAQ.com article: Fact-Checking Dave Ramsey’s Reverse Mortgage Claims.
What happens if at any time the amount you owe under a reverse mortgage is greater than what your home is worth?
Nothing as long as you still live in your home and pay taxes, homeowners insurance, and maintenance.
There are several “payment options” or ways to get money from a reverse mortgage. Which payment option do you think will best meet your needs?
It depends on your situation. Our trained loan officers have helped hundreds of seniors pick the best option for their personal situation. You can do a lump sum payment, ongoing monthly payment, or you may also choose a line of credit allowing you to access your money as you need it. Your line of credit will be guaranteed to grow every year that you don’t use it.
What happens if you change your mind later and want to change your payment plan?
As long as you still have money available to borrow from your reverse mortgage, you can change your disbursement option for a small, one-time fee. Remember when the value of the loan is higher than the home value it does not trigger an early payoff or due date.
When you have a reverse mortgage, do you have to make a monthly mortgage payment to the bank?
No, but for tax or cash flow purposes including Medicaid planning you may wish to do so.
How will the lender determine how much money you will need at closing?
The down payment you will need to bring to closing will be determined based on your age, interest rates at the time and the sales price (or appraised value, whichever is less) of the home you are buying.
When you purchase a home with a HECM, will the HECM be held on your existing home or your newly purchased home?
The HECM will be held on the newly purchased home as your primary residence.
Are there payments over the life of a reverse mortgage?
A reverse mortgage is the only type of mortgage that never requires a payment of principal and interest until the last surviving borrower passes away or moves out of the home, as long as all loan terms are met. You are always required to pay household expenses such as taxes and insurance, and maintain your home. If you take the reverse mortgage as a line of credit, monthly draws, or a lump sum, you will never be required to make a payment during your lifetime as long as you live in your home and meet all other loan terms. You always have the option to make a payment if you wish. If you choose to make a payment toward your line of credit, the money may increase your available funds in your line of credit.
Can a reverse mortgage be used for medical expenses?
Yes. You can use the reverse mortgage loan proceeds for just about anything, including to pay for medical expenses. In fact, one of the most common uses of a reverse mortgage is to pay for long-term care or long-term care insurance (LTCi) policies.
Is a reverse mortgage considered an asset for Medicaid?
While loan proceeds from a reverse mortgage are generally not considered income, Medicaid is implemented by each state, and each state has asset thresholds. Draws from a reverse mortgage, placed in the borrower’s bank account, could jeopardize his or her benefit.
What if I go into a nursing home?
As long as you are simply rehabilitating and getting better, your home and reverse mortgage are still yours until two doctors agree it is impossible for you to ever return to your home.