Homemade Money: A Consumer's Guide to Reverse Mortgages
Session 3 - Overview of Reverse Mortgages
Course Section
Now that you've considered other housing options—and looked at how to decrease your monthly expenses through public benefit programs—it's time to learn more about reverse mortgages. Unlike the traditional "forward" mortgages that you're probably familiar with, a reverse mortgage is a type of loan against your home that doesn't require you to make regular payments. Instead, you pay the money back—plus interest—when you die, sell your home, or permanently move out of your home. You choose the manner in which the mortgage proceeds are paid to you: all at once, as a regular monthly advance, or at times and in amounts that you determine.
Are you eligible?
In order to qualify for most reverse mortgages, borrowers must be at least 62 years old. Owners generally must occupy the home for the majority of the year. Single-family, one-unit dwellings are eligible properties for all reverse mortgages. Some programs also accept two-to four-unit, owner-occupied dwellings, along with some condominiums, planned-unit developments and manufactured homes. Mobile homes and cooperatives are generally not eligible.
How do they work?
Most reverse mortgage loans require no repayment for as long as you live in your home. But when the last living borrower dies, sells the home, or permanently moves away, the loan must be repaid in full--including interest.
Because you make no monthly payments, the amount you owe increases over time. As this amount grows larger, the amount of equity you have in your home--the amount of cash left over after selling the home and paying off whatever you owe--generally grows smaller. But you can never owe more than your home's value at the time the loan is repaid.
What do you get?
When you take out a reverse mortgage, you determine the manner in which the loan is paid to you. You can choose to be paid in a single lump sum of cash, through a regular monthly loan advance, or as a creditline that lets you decide how much cash to use and when to use it. You can also combine these options.
"Public sector" loans—offered by state and local governments—generally must be used for specific purposes such as paying for home repairs or property taxes. "Private sector" loans—offered by banks, mortgage companies and savings associations—can be used for any purpose.
The size of the cash payment from private sector loan depends on the specific reverse mortgage plan or program you select; the differences in available loan amounts can vary greatly from one plan to another. Within each loan program, the cash amounts you can get generally depend on your age and your home's value:
- The older you are, the more cash you can get.
- The more your home is worth, the more cash you can get.
Most homeowners get the largest cash advances from a Home Equity Conversion Mortgage (HECM), the only reverse mortgage insured by the Federal Housing Authority (FHA). HECM loans often provide much greater loan advances than other reverse mortgages.
What do you pay?
For the lowest-cost reverse mortgages, nothing beats state and local programs. Private sector reverse mortgages, by contrast, include a variety of costs. An application fee usually includes the cost of an appraisal as well as a credit report. Other loan costs typically include an origination fee, closing costs, insurance and a monthly servicing fee. You can use the money you get from a reverse mortgage to pay the various fees that are charged on the loan. Known as "financing" the loan costs, these charges are added to your loan balance, and you pay them back with interest when the loan is over.
Reverse mortgages are the most expensive in the early years of the loan, becoming less costly over time. The cost can be very high in the short term, and is least costly if you live beyond your estimated life expectancy.
The federally insured Home Equity Conversion Mortgage (HECM) is almost always the least expensive private sector reverse mortgage. In many cases, HECM loans are significantly less costly than other reverse mortgages. Consumers considering a private sector reverse mortgage other than an HECM should carefully consider how much greater its cost is likely to be before applying.
Proceed With Caution
Federally approved reverse mortgage counselors are required to disclose to consumers that these loans "may have tax consequences, affect eligibility for assistance under federal and state programs, and have an impact on the estate and heirs of the homeowner." Some public benefits programs including SSI and Medicaid, count loan advances as "liquid assets" if you keep them in an account past the end of the calendar month in which you receive them. If your total liquid assets (for example, money you have in checking and savings accounts) is greater than what these programs allow, you could lose your eligibility.
Bottom line: make sure you're familiar with all the details before making a decision.
Keeping it straight
Throughout the seminar, three different types of reverse mortgages will be referred to: single purpose, federally insured and proprietary. If you're having trouble keeping them straight, this chart comparing the three types can help. Print it out and keep it nearby for easy reference.
Glossary
Lump sum: A single loan advance paid to the borrower at closing, the time at which the mortgage begins.
Creditline: A credit account that permits borrowers to control the time and amount of loan advances. Also known as a line of credit.
Loan advances: Payments made to a borrower, or to another party on behalf of a borrower.
Home Equity Conversion Mortgage (HECM): The only reverse mortgage insured by the Federal Housing Administration (FHA). HECM loans are the lowest-cost multipurpose reverse mortgages available, and in most cases they provide the largest total cash benefits. Also known as federally insured reverse mortgages.
private sector loans: Loans made by banks, mortgage companies or savings associations. These loans have higher costs than public sector loans, but can be used for any purpose.
public sector loans: Loans offered by state and local governments for use for a specific purpose, such as paying for home repairs or property taxes.
Appraisal: An estimate of a home's market value.
Closing: A meeting at which legal documents are signed in order to "close the deal"; also the time at which a mortgage begins.
Servicing: Performing administrative functions on a loan after closing.
