What is a Reverse Mortgage?
A reverse mortgage is a home-secured loan that can turn part of the equity you’ve built up in your house into funds you can use today, or a line of credit that will be there when you need it. Specifically designed for homeowners age 62+, it offers all the benefits of a traditional line of credit that you can get from a bank but with additional benefits — including a flexible repayment feature.
As with any mortgage, the title to the home remains in your name, not the lender’s. As with any mortgage, you must meet your loan obligations, keeping current with property taxes, insurance and keeping your home in good condition. (or good shape, or maintenance).
At a minimum, to be eligible you must be 62 years of age or older; you must have a certain percentage of equity in the home, and the house must be your principal residence. For more information, visit our eligibility page.
How Much Can You Receive?
The amount that is available generally depends on four factors: your age, the current interest rate, the appraised value of the home, and government-imposed lending limits.*
Reverse Mortgages Have Some Powerful Advantages
A reverse mortgage has certain advantages over other types of home equity-based loans. If the loan balance exceeds the value of your home when the loan is repaid, you and your heirs are not responsible to pay the excess. As long as you satisfy your loan obligations, which include maintaining your home, paying your real estate taxes, property insurance.
- Establish a rainy day fund
- Supplement your income
- Refinance an existing mortgage
- Repay a home equity loan
- Pay off high-interest rate credit cards
- Be more financially prepared
- Pay for healthcare
- Cover in-home care costs
- Make or pay off a major purchase
- Home improvements
- Home modifications
- Buy a home
How Does a Reverse Mortgage Work?
A reverse mortgage is a powerful financial tool that allows you to turn some of the equity in your home into funds you can use as you choose. Like a traditional mortgage, a reverse mortgage is a home-secured loan; but unlike a traditional mortgage it is specifically designed for homeowners age 62 and older.
The process to obtain a reverse mortgage is simple; but it’s helpful to know what you can expect. Here’s a reverse mortgage roadmap to help you along the way.
STEP 1: PREPARATION
The road to your reverse mortgage starts with education. You may have heard a lot from friends and family or even from television about what reverse mortgages are, but it’s important to weigh all the pros and cons for yourself. An experienced loan specialist like the professionals at Homestead Mortgage LLC can provide you with the information you need to help you decide if a reverse mortgage solution is the right choice for you.
STEP 2: ON THE ROAD
If you decide to move forward, you’ll choose a lender and submit your application to them. The application includes some personal information, and a financial assessment will be conducted to make sure you’ll be able to afford ongoing expenses like property taxes, insurance and home maintenance.
You’ll meet with an independent reverse mortgage counselor who’s approved by the U.S. Department of Housing and Urban Development (HUD)*, to make sure you understand all aspects of the loan.
STEP 3: ROUNDING THE BEND
Your home will be appraised by an independent appraiser, to determine the value. Then the appraisal and loan package will be sent to an underwriter for review and approval. The underwriter will make sure all the information in the package is correct, complete, and compliant with all applicable laws and regulations.
STEP 4: ALMOST THERE
After your loan application is approved, you will sign your closing documents with a title officer or attorney (depending on your state’s requirements).
STEP 5: ARRIVAL
Three days after closing, the loan funds are disbursed and you can access them according to the payment plan you selected. Your loan funds will first be used to pay off any existing mortgage on your home, a new lien (the reverse mortgage) is placed on the home, and you can use the remaining funds from your reverse mortgage however you choose.
Reverse Mortgage Pros and Cons
PROS of a Reverse Mortgage
- It’s a loan option that can help make it easier for homeowners and homebuyers age 62 and older to live a more comfortable retirement.
- You continue to live in your home and retain title to it. As with any mortgage, you must meet your loan obligations, keep current with property taxes, insurance, and maintenance.
- You can choose to take your funds as a lump sum; line of credit that you can tap as needed; a steady stream of monthly advances for a set period of time, or as long as you live in the home; or a combination of these options. Borrowers who elect a fixed rate loan will receive a single disbursement lump sum payment. Other payment options are available only for adjustable rate mortgages.
- The funds from your reverse mortgage loan can be used to pay off the existing mortgage on your home. While there will still be a lien on your home for the outstanding amount of the reverse mortgage, you are not required to make monthly principal and interest payments on the reverse mortgage, so you will be freed from the monthly mortgage payment expense. As with any mortgage, you must meet your loan obligations, keep current with property taxes, insurance and maintenance.
- No monthly mortgage payments are required for as long as you live in the home and continue to meet your obligations to pay your property taxes and homeowners insurance and maintain the property. As with any mortgage, you must meet your loan obligations, keep current with property taxes, insurance and maintenance.
- Closing costs and ongoing fees, such as the Federal Housing Administration (FHA) Mortgage Insurance Premium (MIP), can be financed with the reverse mortgage loan — so out-of-pocket expenses can be minimal.
- Loan proceeds are generally not considered taxable income. (Not tax advice; consult a tax professional.)
- Generally, a reverse mortgage loan will not affect Social Security or Medicare benefits. However, you may wish to consult a financial professional to determine the potential financial implications of obtaining a reverse mortgage loan. The funds from a reverse mortgage generally do not affect regular Social Security. However, needs-based benefits, such as Supplemental Security Income (SSI), may be impacted. Consult a financial professional or government benefits specialist about your particular situation. Visit www.ssa.gov.
- A reverse mortgage loan is a non-recourse loan. This means that neither you nor your heirs are personally liable for any amount of the mortgage that exceeds the value of your home when the loan is repaid.
- If your home increases in value in the future, you may consider refinancing your reverse mortgage to access even more loan proceeds.
- After the loan is repaid, any remaining equity belongs to you or your heirs.
CONS of a Reverse Mortgage
- The loan balance increases over time as interest on the loan and fees accumulate.
- As home equity is used, fewer assets are available to leave to your heirs. You can still leave the home to your heirs, but they will have to repay the loan balance. Usually, the loan is paid off by selling the home. However, this can be done using other funds or by refinancing through a traditional mortgage.
- Fees may be higher than with a traditional mortgage. (Ask us about our lower-cost options.)
- Eligibility for needs-based government programs, such as Medicaid or Supplemental Security Income (SSI), may be affected. Consult a benefits specialist.
- A reverse mortgage loan becomes due and must be repaid when a “maturity event” occurs, such as the last surviving borrower (or, in the case of a HECM, non-borrowing spouse meeting certain conditions) passes away, the home is no longer the borrower’s principal residence. The loan will also become due if the homeowner fails to meet other loan obligations, which include paying their property taxes, insurance, and maintaining the property.
Reverse Mortgage Eligibility Requirements
- All borrowers on the home’s title must be at least 62 years old. The older you are, the more funds you can receive from a Home Equity Conversion Mortgage (HECM) reverse mortgage.
- You must live in your home as your primary residence for the life of the reverse mortgage. Vacation homes or rental properties are not eligible.
- You must own your home outright or have at least 50% equity in your home. Even if you owe some money on your existing mortgage, you may be eligible for a reverse mortgage. The funds from the reverse mortgage would first pay off your mortgage and satisfy any other eligible existing liens before you could use the funds for other things. Refinancing existing debt(s) with a reverse mortgage can help improve monthly cash flow.
- You must meet with an approved reverse mortgage counselor. The reverse mortgage counselor will discuss how a reverse mortgage works and the associated costs. The goal of the counseling session is to make sure that potential borrowers fully understand and are comfortable with the process and the loan terms.
HECM PROPERTY REQUIREMENTS
- Single-family homes, or 2-to-4 unit properties with one unit occupied by you
- Manufactured homes (built after June 1976) that meet HUD requirements
- Condominiums that are FHA-approved*
- You must show the financial ability and willingness to meet your loan obligations, which include paying property-related taxes and insurance, and keeping up with regular home maintenance and repairs.