Reverse Mortgage Facts & Information

Marcela Otero    Feb 16, 2017
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Reverse mortgages need all the good press they can get. What was once considered a risky, last ditch, underhanded sort of financial deal which left your heirs holding the short end of the stick, is now enjoying a bit of a revival. As interest rates are expected to rise, taking out a reverse mortgage is being hailed by financial advisers as an excellent way to pad nest eggs for retirees as young as 62, in order to let it grow. If you only tap it when needed, your retirement-income portfolio can benefit from an increase in long-term sustainability. This tactic, called a Standby Reverse Mortgage, calls for only drawing on the line of credit for essentials, when other investments (like stocks and bonds) are down. You still enjoy a steady income, while giving your other investments time to recover.

 

First things first, though. Just what is a Reverse Mortgage, exactly?

In a Reverse Mortgage, a lender takes the equity you own and pays you against that amount. The money you get is usually tax-free, and generally doesn’t have to paid back for as long as you live in your home. After you pass away, sell your home or move out, the loan must be repaid in full.

 

What types of reverse mortgages are there? What are the differences between them?

There are three main ones: single purpose reverse mortgages, proprietary reverse mortgages, and federally-insured reverse mortgages, also known as home equity conversion mortgages (HECMs). Most people don’t know it, but you can also finance a new home with a reverse mortgage, through a fourth type: the home equity conversion mortgage for purchase (H4P). The differences between them will be outlined below, but they mainly differ in terms of purpose for which they can be used and who insures them.

  • Single Purpose Reverse Mortgage - Offered mainly by state and local agencies and some non-profit organizations for seniors with extraordinarily low incomes, this type of mortgage isn’t federally insured, which means that the insurance premiums don’t need to be paid. While this can save you more than $10k during the life of the loan, it’s important to mention that this mortgage can only be used for the lender-specified purpose (i.e. home repairs or property taxes).

  • Proprietary Reverse Mortgage - These mortgages, on the other hand, are underwritten by private lenders. Though subject to government regulation, they’re not eligible for federal insurance. These tend to be more expensive and cater to homeowners with higher property values.

  • Home Equity Conversion Mortgages (HECM) - By far the most well-known type of reverse mortgage, these are federally insured by the FHA and account for 90% of reverse mortgages in the U.S. The amount you can borrow is based on the appraised value of your home, and though interest accrues on the outstanding loan balance, the rates are generally lower that with the other two types. Since the property itself is offered as security, no credit check is made on the borrower. The money can be paid out as a line of credit, lump sum, or monthly payment. Interest rates can be adjustable or fixed (only available as an option for the lump sum payment).

  • Home Equity Conversion Mortgage for Purchase (H4P) - Odds are, most people aren’t aware you can buy a property using the equity from your current home in the form of a reverse mortgage. Not having to make a monthly payment on the new house reduces your fixed costs and can offer you the choice of downsizing or conversely, even upsizing, during retirement. This can also free up assets from the sale of the previous home, which in turn can be invested for future use. We have a whole article on this which I suggest you check out if you think this might be a good option for you.

What should I know about qualifying?

Reverse mortgages have a few requirements, but these shouldn’t faze you. The process is generally much simpler than taking out a first mortgage, and if you’re considering a reverse one, it should all be pretty much old hat.

  • Age - To qualify for an HECM, you must be a retiree at least 62 years old. Though some private lenders offer Proprietary Reverse Mortgages for seniors as young as 60, 62 is generally the start-off point for any program.

  • Ownership - You must either own your home outright or have a low mortgage balance that would be paid off with the reverse mortgage. Said property must be a single-household home or a 2-4 unit home with one unit occupied by the you, the borrower.

  • How much can I get? - The amount of money you can get from your home depends on the age of the youngest borrower, current interest rate, and the lesser of appraised value or the HECM FHA mortgage limit of $625,500 or the sales price.

When is a Reverse Mortgage a bad choice for me?

  • If you want to leave your house to your heirs scot free, then a reverse mortgage may not be the best choice for you, as in the event of your death, they would have to pay the balance on your loan.

  • The same applies if you live with someone. Since one of the conditions of the mortgage is that you must be the primary resident of the home, the loan becomes due once that’s no longer the case, and whoever is living with you would have to move out. If that person is younger than 62, they can’t co-sign the loan with you. However, HUD recently changed the rules on that. To find out more, check out our Foreclosure article.

  • You need the money for medical bills. While this is certainly a viable way to obtain some cash for medical expenses, if your condition is such that it may require you leaving the home for a care facility for 12 months or more, then the mortgage automatically defaults. If it isn’t paid, the lender forecloses and sells.

  • You’re thinking of moving soon and aren’t taking out an H4P mortgage. The upfront costs for a reverse mortgage can mount up quickly, including an origination fee; up-front mortgage insurance and its ongoing premiums; as well as closing costs, which include property title insurance, a home appraisal fee and a home inspection fee.

  • You’re still responsible for home costs like property taxes, home insurance, and maintenance. If you have enough equity, the reverse mortgage payments might cover these fees, but that’s something you must consider when crunching the numbers.

As we mentioned at the beginning of the article, reverse mortgages can be a valuable addition to your retirement-income portfolio, if you make the decision wisely. When a reverse mortgage is taken in the interest of looking towards long term planning, especially since once the initial credit limit is set, it grows exponentially each year by the current interest rate on the loan, plus 1.25 percentage points (the loan’s annual mortgage-insurance charge). It can also mitigate the danger of your house’s value falling, since the credit line grows regardless of those market changes. If, conversely, the value rises, you could take out a new, larger credit line, adjusted to the new change.

Just like with any major financial decision, we recommend you first consider what you need the money for, and the study your options carefully. See if a Home Equity Loan makes more financial sense for you. Making a sample budget for different types of mortgages at different rates can help you gain insight into the viability of a reverse mortgage for you. For more on what happens to a home in the event you leave it, this article explores the subject in depth.

We encourage you to consult with a financial professional for advice on what makes the most sense in your own personal situation. However, if you’re at the right age & you think you’d make a good candidate for a reverse mortgage, our editors have done the work of rating the 10 best reverse mortgage companies of the year, which you can use to help find an ideal match based on your needs.