Brief Answers to the Most Common Reverse Mortgage Questions
Below are the reverse mortgage frequently asked questions that I have answered over the years. In order to keep this page from going on forever, I’ve kept the answers as brief as possible. I’ve attached links to other Reverse Mortgage Colorado pages for the most common reverse mortgage frequently asked questions.
However, if you don’t think that I’ve answered your specific reverse mortgage question adequately enough, please contact me at (303) 467-7821 or toll free at 877-467-7801. I will answer you call personally (I cannot afford a secretary), and if I receive other questions about the same topic, I will make sure to update the site.
Getting a Reverse Mortgage requires that the homeowner must speak to HUD-approved independent third-party Housing Counselor. His requirement is one of the reasons that Reverse Mortgage have gotten the undeserved reputation as being a scam. Because: what other mortgages or loans require that you speak to a third-party counselor? It CAN make it seem kind of fishy, right?
But in reality, the counseling requirement adds an additional safety measure to make sure you understand exactly how the program works. What you have to realize is, the most popular Reverse Mortgage is the FHA-insured Home Equity Conversion Mortgage, which is realistically THE most regulated loan that FHA insures.
And because of that, the FHA wants to make doubly sure that you completely understand the pros and cons of this program. Because the Housing Counselor doesn’t write the mortgage, there’s no incentive for them to influence you one way or the other. They’re completely neutral.
Two good things: the counselor will review your budget to make sure that you can afford to live in your home, as well as see if you qualify for any government benefits. So don’t take the FHA’s requirement for an independent counselor to be any kind of indication that a Reverse Mortgage is risky or dishonest.
With a phone call I can explain how all this works. It’s really a very simple step in the process of deciding if a reverse mortgage is right for you.
Reverse Mortgages have not had the best reputation. Like anything in the financial world, a few bad actors can ruin the reputations of everyone else in this industry. Many negative perceptions came from the early days of Reverse Mortgages back in the nineteen seventies and eighties.
These problems were corrected in 1989 when the AARP pushed to have Reverse Mortgages become an FHA-insured program. But like all bad reputations, this one has been hard to lose. A lot of senior homeowners and financial professionals still view Reverse Mortgages as a loan of last resort. Which is not the case.
I’ve been in this industry since January of 2003, I’ve written more than six hundred and fifty Reverse Mortgages. I’ve helped homeowners get the income they need for retirement without being a financial burden on their children. With a single phone call we can see if a Reverse Mortgage is the right financial step for you and your family
This is a very common question. The people who are on title prior to receiving the reverse mortgage continue to own the home after the reverse mortgage has been closed.
It is simply a loan against the property, just like any other home loan. Having said that,you, the homeowner are responsible to pay the property taxes, homeowner’s insurance and all maintenance on the home.
All homeowners must:
- Be at least 62 years of age
- Live in the home as their primary residence
- Have equity in the home (typically 40% – 60% equity)
- Meet with a HUD approved reverse mortgage counselor prior to application
The loan only comes due when the last homeowner leaves the home permanently. This can be from passing away, selling, or moving into a nursing home or assisted living facility. At that time, the amount borrowed, plus all accrued interest and fees will be due.
Typically, the heirs will sell the home or refinance the loan to pay off the reverse mortgage.Whatever remaining equity there is will go to the estate or the heirs.
If the home is upside down and more is owed on the home than it is worth, neither the homeowner, the heirs, nor the estate are responsible to repay the loan. All reverse mortgage loans have mortgage insurance to cover any loss, so the absolute worst case scenario is that there is no equity in the home.
This is a 100% non-recourse loan.
A reverse mortgage is an FHA insured loan specifically designed for homeowner’s age 62 and above, that allows you to convert a portion of the value of your home into tax free money*,without having to sell your home, give up title or obligate yourself to a monthly mortgage payment.
HECM stand for Home Equity Conversion Mortgage. This is FHA’s (Federal Housing Authority), name for the reverse mortgage that they insure. Today, probably 99% of reverse mortgages are HECM’s, meaning that they are FHA insured.
The home does not have to be owned free and clear in order to get a reverse mortgage. However, whatever is owed on the current mortgage must be paid off with the reverse mortgage proceeds.
As of April 27th of 2015, all lenders must now verify that homeowners who apply for a reverse mortgage have the willingness (good credit) and capacity (income) to be able to afford to live in their homes once they have the reverse mortgage. This means that they must be able to afford to pay the property taxes, homeowner’s insurance and maintenance on the home along with the rest of their bills. The homeowners must also have a good payment history.
The qualification standards are not nearly as strict as they are for “forward’ mortgages. We also allow for “extenuating circumstances” with credit issues and “compensating factors” in dealing with income shortfalls.
Reverse mortgages offer both a fixed rate and an adjustable rate. If you choose the fixed rate, you have only one payout option – to take all the money out in one lump sum.
If you choose the adjustable rate, you have more flexible payout options:
- Lump sum
- Line of credit
- Monthly payment
- Any combination of the three
Note – Effective Nov 10, 2014, HUD instituted limits on the initial disbursement. What this means is that HUD limits the amount of money that you can take out during the first 12 months of the loan unless you are using it to pay off “mandatory obligations” such as loans against the home, taxes or other liens.
For example, if you have a $190,000 and can get $100,000 from the reverse mortgage, HUD limits the amount that you can withdraw during the first 12 months to $60,000 (60% of the $100,000 available).
You of course are charged interest on whatever money that you have taken out but you are also charged ongoing mortgage insurance at the rate of 0.50% on the balance of the loan. Remember, these charges are added to the loan balance. You do NOT pay them directly like you would a regular mortgage.
There is a choice of either a fixed rate or an adjustable rate depending on how you choose to receive the funds and which program you want.
The adjustable rate is tied to the London Inter Bank Offered Rate (LIBOR) with a margin of 225 – 300. The fixed rate is currently running from 4.5% – 5.75% depending upon the program and fees you choose to pay for.
Please be aware that if you choose a fixed rate, you have to take all the funds up front in one lump sum and you may get a lesser amount than the adjustable rate due to the initial disbursement limits discussed above.
The easiest way to explain the fees is to break them down into three categories:
1. Upfront Mortgage Insurance Premium
This is a one-time fee that is charged by the government to protect both the lender and your estate in the case of the loan balance exceeding the value of the home at the time the last homeowner permanently leaves the home. It is equal to 2% of the value of the home, up to a max value of $679,650. So a $200,000 home value would mean a $4,000 upfront mortgage insurance premium.
2. Origination Fee
The origination fee is charged by the broker or lender to either buy down the interest rate or to cover some of the costs of origination the reverse mortgage. Most of the time, fixed rate reverse mortgages do not have an origination fee. This can change in the future.
Sometimes brokers charge an origination fee on adjustable rate reverse mortgages if the amount that you’re taking out upfront is small or you choose the monthly option.
3. Other Closing Costs
This encompasses all the other, “normal” closing fees such as the appraisal, title insurance, closing fee, recording, credit check, etc…
There are no fixed loan-to-value ratios with a reverse mortgage. The amount that is available is based on:
- The age of the youngest homeowner
- The value of the home (up to the FHA maximum loan amounts – currently $679,650)
- The current interest rate
- The program option that the homeowners choose
Typically, the amount we can loan will fall between 40% to 60% of the home value, up to the FHA lending limit.
HUD dictates to us, the lenders, how much money is available from the reverse mortgage. We have to make that amount of money available, but you do not have to take it. If you don’t want it all right now, you have the option to set up a line of credit. The reverse mortgage line of credit works very similar to a regular home equity line of credit that you’d get at your local bank…with a couple of differences.
One big difference is that with a reverse mortgage line of credit, as long as you pay your property taxes and keep your homeowner’s insurance up to date along with maintaining the home, the lender can never reduce or close out your line of credit if there is money available.
For example in 2009 and 2010, I heard stories about banks cutting or closing people’s HELOC loans because the underlying asset, the home, had gone down in value. This can NEVER happen with a reverse mortgage line of credit.
The other big difference is that the amount of money left in your line of credit grows over time. Let me be perfectly clear here though, you do not earn interest on this account. The growth in the line of credit simply allows you to access more money at a future date.
This of it this way, you get a credit card with a $5,000 limit. After a year, the lender increases your limit to $6,000. That extra $1,000 is not free money and it is not interest. It just allows you to borrow more money. You will be charged interest on it if you use it and it will eventually need to be paid back. That is the same way that the reverse mortgage line of credit growth rate works.
A reverse mortgage is just a loan against your home. The lender has a lien against the title. You are still charged interest, just like any other loan, however, you do not pay it on a monthly basis. You never send in any monthly payments because the interest is deferred to the end of the loan.
You have the benefit of no mortgage payments, but every month, the interest that is charged is added to the loan balance, so the balance continues to grow over the life of the loan. This is truly a 100% negative amortization loan.
These days, many Baby Boomers like you are finding yourselves in a tough financial squeeze: helping your aging parents while still trying to plan for you own retirement. And lots of Boomers are also helping to pay college expenses for kids and even grandkids. You need choices and options. And most of all, you need to know you’re not alone.
By helping your parents access the equity in their home with a reverse mortgage, you can help them to age gracefully at home…independently, while keeping your own money free to plan for your retirement. And even help your kids with college.
One of my favorite things about being in the Reverse Mortgage industry is showing a younger retiree — say, someone in their early sixties — how their home equity can be a very powerful arrow in the quiver of their financial plan. If you’re an affluent Baby Boomer, you can prolong the life of your investment portfolio by establishing a reverse mortgage line of credit that you can access when the market is down.
That way, you’re not having to draw from a depreciated investment account. With a single phone call we can see if a Reverse Mortgage is the right financial step for you and your family.
Yes. It works like this:
Let’s say that you have a home worth $150,000 now that you own free and clear. It could be getting too much to care for, too much yard, or too many stairs, either way you want to move. You’re concerned though because you’ve done some looking around and any nice patio home or condo is more than what you will get from your current home and you do not want to get a mortgage with a monthly payment, but you also don’t want to completely deplete all your savings either.
This is where the reverse mortgage comes in. Let’s say that you found a very nice patio home for $200,000 and we can loan you $110,000 on this new home. You have $130,000 from the sale of your old home, (remember all the costs associated with selling a home), that you can use. But with the reverse mortgage you only have to use $90,000 for the down payment.
So you keep $40,000 from the sale of your old home, and you get to move into the new home with no mortgage payment. You get to “downsize, but upgrade”.
No. As long as you, the homeowner, pay the taxes and insurance on the home, as well as continues to live in the home and maintain it, you never have to move.
The loan only comes due when the last homeowner permanently leaves the home or on the youngest homeowner’s 150th birthday.