What is a Reverse Mortgage?
A reverse mortgage is a home loan that you do not have to pay back for as long as you live in your home. It can be paid to you in a lump sum, as a regular monthly income, or at the times and amounts that you want. The loan and interest are repaid only when you sell your home, permanently move away or die.
Eligible Homeowners
All homeowners must be at least 62 years old
At least one of the home owners must live in the home most of the year
Must have some home equity
Eligible Homes
Single family, one-unit dwelling.
Two-to-four units, owner-occupied dwelling.
Some condominiums, planned developments or manufactured homes.
(+NOTE Cooperatives and most mobile homes are not eligible)
If you live in a mobile home park and rent a space you are not eligible, you are also not eligible if your mobile home was built before 1973.
Manufactured homes and trailers must have a concrete or concrete block foundation.
How do Reverse Mortgages Work?
Most require no repayment for as long as you live in your home.
They are repaid in full when the last living borrower dies, sells the home, or permanently moves away.
Because you make no payments, the amount you owe will grow over time. By law, you can never owe more than your homes value at the time the loan is repaid.
You continue to own the home, so you must pay the property taxes, insurance, and repairs. If you fail to pay these, the lender can use the loan to make payments or require you pay the loan in full.
How much will I get with a reverse mortgage?
The amount you receive depends on your age, value of the home and location, and cost of the loan. In general the older you are the greater amount you are eligible for, depending on the value of the home.
Most people get the most money form the Home Equity conversion Mortgage (HECM), a federal insured program. For homes with values greater than 500,000 there are specific programs that are better suited to higher end homes.
You can receive monthly payments, lump sum or combinations of both
You can open a reverse mortgage line of credit and wait to use later
In some cases you will be required to make repairs to your home before the loan is approved. The repair costs are deducted from your loan amount. Example if your reverse mortgage is $100,000 and you need $10,000 of repairs your loan available is $90,000.
What can I use a reverse mortgage for?
You can use the proceeds from a reverse mortgage for just about everything, Income supplement, pay current debts, investing. In most cases your reverse mortgage income is tax free (Consult your tax advisor).
What are the costs for a reverse mortgage?
Application fee
Insurance
Origination fee
Monthly service fee
Closing costs
Interest
Are interest Rates Fixes or Variable?
Most reverse mortgages have a variable interest rate, based on the Treasury bill, or the LIBOR rate. Some new reverse mortgages will have the option for a fixed rate, this will be available in the future.
A reverse mortgage is a way to access your homes equity and turn that equity into cash. The best part is that you do not have to make payments to repay the loan.
Pro's - Con's of Reverse Mortgages
Pro's
- No payments
- No income qualification
- Flexibility in payments
- Payments tax free (consult your tax advisor)
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- Retained home equity may still appreciate
- Your heirs will never be liable for the loan
- You can stay in your home, as long as you pay insurance and maintain the home
- You can pay off existing debt and improve your cash flow
- You can use the funds for just about everything
- You retain the title to your home
-Reverse mortgage can be integrated with other assets to enhance tax effectiveness (consult your tax advisor)
Con's
- Upfront costs may be higher than traditional loans
- Should not do a reverse mortgage if you plan on selling your home in 5yrs or less
- Should not do a reverse mortgage if your health is a concern
- Home equity can reduce over time
- May leave less assets to heir's
Loan Process
You are required to have a visit with a federally-approved reverse mortgage counselor as part of getting a reverse mortgage. I would encourage a family member to sit in on the visit. The counseling visit can be done over the phone or your can see someone in person.
Determine which reverse mortgage works for your
A reverse mortgage application will need to be filled out, this will take 45-min to an hour
Once the application has been received and reviewed an appraisal will be ordered. The appraiser is looking to determine the value of your home and see if there is major structural damage, such as a roof leaking. Once the appraisal is received and your home is valued a credit check is done along with a review of the title. Lenders want to know the outstanding loans to pay off or if there are any additional leans on the residence.
Assuming that your home is in good shape and no additional forms are required a loan can be approved in 45 days, some firms feel they can do it faster but in my experience 45 days is the average.
Once approved a second round of forms for signatures is required, this last round or forms tells you're what your current interest rate is, and the costs for the reverse mortgage. All paperwork prior is estimation. The forms are notarized and then you have a three day cooling off period to change your mind if you wish, if no changes a check is wired to your bank account.
The process for a reverse mortgage is straight forward but things do happen. Here is a sample of factors that may affect the loan that you are offered:
- Roof repairs done by unlicensed contractors
- Home appraisal is lower than you thought
- Unexpected lien on the title
- Home requires a significant amount of work
The key to processing the loan is loan processor, the firms that we have partnered with have done many reverse mortgages and stay on top of the loan to make sure the loan is processed in a timely manner.
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