A reverse mortgage enables older homeowners (62+) to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you. Below are some common questions asked by consumers about reverse mortgages.

The latest FHA insured reverse mortgage product to explode onto the market is a lower margin Home Equity Conversion Mortgage. This has all the features of the very popular FHA HECM reverse mortgage loan and allows borrowers to access more of their equity at a lower cost over the life of the loan. This is great news, made possible by a 1/2 percent reduction in the interest rate. Qualified clients can now have more cash to eliminate a mortgage payment, pay off credit cards, travel or fix up their homes. Other clients, previously disqualified, may now access the benefits of a reverse mortgage program.

Thousands of people each month improve their lives by taking advantage of a reverse mortgage to increase their monthly income.

• - Eliminate debt - pay off mortgages or credit cards
  
• - Ease worries by having extra cash available to spend each month
  
• - Access extra cash to renovate or remodel your home
  
• - Create that dream kitchen or bathroom (or both) you've always wanted
  
• - Have extra money to travel

The amount of funds your clients are eligible to receive depends on their age (or the age of the youngest spouse in the case of couples), the appraised home value, interest rates, and in the case of the government program, the lending limit in their area. In general, the older they are and the more valuable their home (and the less they owe on your home), the more money they can get. Click here to refer a client to see how much they qualify for.

Eligible property types include single-family homes, 2-4 unit properties, manufactured homes (built after June 1976), condominiums, and townhouses. In general, cooperative housing is ineligible. However, some lenders have developed private programs that lend on co-ops in New York.

Your clients can choose to receive the money from a reverse mortgage all at once as a lump sum, fixed monthly payments either for a set term or for as long as they live in the home, as a line of credit, or a combination of these. The most popular option – chosen by more than 60 percent of borrowers – is the line of credit, which allows borrowers to draw on the loan proceeds at any time. To learn more, click here.

A common misconception about the line of credit is that the borrowers will be earning interest. This is absolutely not true, although many "professionals" will lead their clients to believe they do earn interest. What is really happening is the unused portion of the line of credit will grow at a percentage equal to the interest rate, which increases the amount of money available to the borrower in their line of credit.

There are no limitations on how the loan proceeds can be used, whether its to supplement retirement income to cover daily living expenses, repair or modify a home, pay for health care, pay off existing debts, buy a new car or take a "dream" vacation, cover property taxes, and prevent foreclosure.

With a reverse mortgage, borrowers are charged interest only on the proceeds that they receive. Most reverse mortgages charge a variable interest rate (although we do offer fixed rate reverse mortgages) that is tied to an index, such as the 1-Yr. Treasury Bill or the London Interbank Offered Rate (LIBOR), plus a margin that typically adds an additional one to three percentage points onto the rate they're charged. Interest is not paid out of their available loan proceeds, but instead compounds over the life of the loan until repayment occurs.  

No monthly payments are due on a reverse mortgage while it is outstanding. The loan is repaid when the borrowers cease to occupy their home as a principal residence, whether they (the last remaining spouse, in cases of couples) pass away, sell the home, or permanently move out. The amount owed can never exceed the value of their home. Furthermore, if the home is sold and the sales proceeds exceed the amount owed on the reverse mortgage, the excess money goes to the borrower or their estate.

They may qualify for a reverse mortgage even if they still owe money on an existing mortgage. However, the reverse mortgage must be in a first lien position, so any existing indebtedness must be paid off. They can pay off the existing mortgage with a reverse mortgage, money from their savings, or assistance from a family member or friend.

 

If they find themselves in a deficit situation where there's not enough money to pay off the existing mortgage, they may use funds from a grant or gift from a family member or friend to cover the gap, but they cannot incur a new debt obligation (i.e., loan).

Under the FHA HECM program, borrowers  are charged a monthly servicing fee that ranges from $30-$35 to manage their account once the loan closes. The service fee set-aside is an estimate of what the total servicing fees will be over the life of the loan, by multiplying their life expectancy (converted from years into months) and multiplied by either $30 or $35.

 

Although it's not considered a closing cost, the service fee set-aside can equal several thousand dollars, which is deducted from their available loan proceeds. They do not have access to that money, nor do they earn interest.  

A reverse mortgage does not affect regular Social Security or Medicare benefits. However, if your clients are on Medicaid, any reverse mortgage proceeds that you receive must be used immediately. Funds that they retain would count as an asset and could impact Medicaid eligibility. For example, if they receive $4,000 in a lump sum for home repairs and spend it all the same calendar month, everything is fine. Any residual funds remaining in their bank account the following month would count as an asset. If the total liquid resources (including other bank funds and savings bonds) exceed $2,000 for an individual or $3,000 for a couple, they would be ineligible for Medicaid. To be safe, they should contact the local Area Agency on Aging or a Medicaid expert.

Counseling is one of the most important consumer protections built into the program. It requires an independent third-party to make sure your client understands the program, and reviews alternative options, before they apply for a reverse mortgage.

 

By law, a counselor must review (i) options, other than a reverse mortgage, that are available to the prospective borrower, including housing, social services, health and financial alternatives; (ii) other home equity conversion options that are or may become available to the prospective borrower, such as property tax deferral programs; (iii) the financial implications of entering into a reverse mortgage; and, (iv) the tax consequences affecting the prospective borrower’s eligibility under state or federal programs and the impact on the estate or his or her heirs.

Borrowers need to be at least 62 and have enough equity in their home to get a reverse mortgage. There are no special income or medical requirements.