Frequently Asked Questions
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This page does not promote any organization, product or service; nor does it give advice. Rather it states facts and opinions in the form of Questions and Answers.
Within this page, any mention of a Reverse Mortgage refers to a HECM monthly (the most popular, government insured) Reverse Mortgage.
Do I have to make monthly payments?
Unlike a home equity line, a Reverse Mortgage does not require you to make monthly payments. You will NEVER have to make a monthly payment with a Reverse Mortgage.
When do I have to pay back the loan?
As long as you or your spouse live in the home you do not have to pay back the loan. Your Reverse Mortgage must be repaid once both of you no longer live in the house.
Is there an early repayment penalty?
No, you may repay some or all of the balance at any time without penalty.
When the Reverse Mortgage becomes due, how much do I have to pay back?
The amount you owe on a Reverse Mortgage generally grows over time. Interest is charged on the outstanding balance and is added to the amount you owe. This means your total debt increases over time as loan funds are advanced to you and as interest accrues on the loan. However, the outstanding balance to you will never be more than the value of your home.
If I pass away, will my children be left with debts?
Not from a Reverse Mortgage. A Reverse Mortgage can actually protect your estate because the accrued loan will never exceed the value of the home.
For example, if you pass away and leave to the children:
A home worth:
An investment portfolio worth:
An unpaid Reverse Mortgage Loan worth:
Your estate would get the full investment portfolio of $100,000, even though full
repayment of your Reverse Mortgage is not covered by the value of your home.
It sounds too good to be true. Is it a scam?
No. There is full government oversight. The Reverse Mortgage is an insured federal program. The Reverse Mortgage is under the authority of HUD, the US Department of Housing and Urban Development.
Are there upfront fees for a Reverse Mortgage?
Most Reverse Mortgages incur closing costs, however all of these closing costs usually
can be financed through the loan. There are little or no out of the pocket expenses
for the borrower.
Do I still have to pay property taxes and homeowner’s insurance?
Because you retain title to your home, you remain responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. If you do not pay property taxes or maintain your homeowner’s insurance, your loan may become due and payable.
Does a Reverse Mortgage affect my income taxes?
No, it is your money that you receive. A Reverse Mortgage is tax-free and does not affect your tax bracket, however what you do with the money might impact your taxes. For instance if you buy bonds, their coupons may be taxable. You should consult with your tax advisor.
Does a Reverse Mortgage affect my Social Security or Medicare benefits?
Again, the Reverse Mortgage does not affect these. You are still entitled to your full Social Security and Medicare benefits. As always, consult with a specialist who is familiar with your particular case.
Does a Reverse Mortgage affect other benefits that I receive?
A Reverse Mortgage may have an impact on your Supplemental Security Income (SSI)
or Medicaid. These are need-based programs. If you reach a certain level of liquid
assets you may not qualify for the programs anymore.
As a general rule, if you do not draw more funds from the Reverse Mortgage than you spend within a month, these programs should not be affected. If you depend on any assistance or benefit program, you should talk with a specialist who is familiar with your particular case.
How is the Reverse Mortgage paid to me?
There are three options of payment from a Reverse Mortgage:
- A lump sum up front
- A line of credit (for most Reverse Mortgages the line of credit grows over time)
- Monthly income (technically speaking it is not income but rather disbursement)
Most Reverse Mortgages leave you complete freedom as to how you want to receive your cash. You can chose any combination of the above options and also you may change your mind during the course of the Reverse Mortgage – as long as you have not consumed all of the funds.
What can the funds from a Reverse Mortgage be used for?
You are free to spend the money on whatever you like, with very few exceptions. The exceptions are as follows:
- Mortgages and Liens against the house have to be paid off at closing.
- If, according to an appraiser or inspector, the house needs repair, these repairs
must be made and usually can be funded by the proceeds of the loan. Sometimes you will be required to set aside some funds for repair.
- Closing costs can be financed through the Reverse Mortgage.
What is a HECM Reverse Mortgage?
The Home Equity Conversion Mortgage (HECM) is by far the most popular Reverse Mortgage. It provides all of the benefits of the Reverse Mortgage and it is federally guaranteed. This provides more safety for the borrower and lender, resulting in lower interest rates.
What types of homes are eligible?
Your home must be a single-family dwelling or a two-to-four unit property that you own and occupy. Townhouses, detached homes, units in condominiums (with some restrictions) and some manufactured homes are eligible. The home must be in reasonable condition and must meet HUD minimum property standards. In some cases, home repairs can be made after the closing of a Reverse Mortgage.
What's the difference between a Reverse Mortgage and a home equity line of credit?
With a traditional second mortgage, or a home equity line of credit (HELOC), you must have a sufficient income versus debt ratio to qualify for the loan, and you
are required to make monthly mortgage payments. There is also a termination date. In contrast, the Reverse Mortgage pays you and is available regardless of your current income.
The biggest difference between a home equity line of credit and a Reverse Mortgage may be the risk of losing your home. A Reverse Mortgage requires no repayment
as long as you live in your home.
How much money can I get from my home?
The amount you can borrow depends on your age, the current interest rate, the location of your home, and the appraised value of the home, as well as some other factors. Generally, the more valuable your home, the older your age, and the lower the interest rate, the more you can borrow.
I don’t like debt – so I feel uncomfortable with a Reverse Mortgage.
If you can pay for all of your needs and do not have credit card or mortgage debt
requiring monthly payments, then a Reverse Mortgage may not be right for you. However, if you carry credit card or other debt or are short on liquid funds, a Reverse Mortgage will give you security at a low long-term cost.
Also, keep in mind that a Reverse Mortgage differs from most other debt as it does not require monthly payments and has no fixed due date. Most of the characteristics, , which make debt risky do not apply to a Reverse Mortgage.
When will I have to pay the Reverse Mortgage back?
The Reverse Mortgage becomes due when both you and your spouse do not live in your home any longer. In a typical scenario, the house will be sold, the Reverse Mortgage repaid, and you or your heirs will receive the balance.
I would like one of my children to take over the home later – will that still be possible with a Reverse Mortgage?
Yes. In this situation there is not much difference between a Reverse Mortgage and
a conventional mortgage. The new owner must pay off the Reverse Mortgage through
available assets or by obtaining a conventional mortgage.
What will the interest rate be?
The interest rate in a Reverse Mortgage is adjustable, not fixed. It depends on a benchmark such as the 1-year Treasury bill. Thus, there is no accurate way to predict the interest rate.
Why are closing costs for a Reverse Mortgage higher than with other mortgages?
The closing costs of a Reverse Mortgage may be higher than those of a traditional mortgage or an equity line.
The biggest part is used for insurance – to protect you.
Other parts go to appraisers, inspectors and third parties that verify for you and the lender that your house is in good condition. This in turn allows the lender to offer you a loan without a fixed due date at very low rates.
Why do I need mortgage insurance – I already have homeowner insurance?
Most Reverse Mortgages come with insurance. This may be the best insurance you ever bought. Homeowner insurance protects your home against physical harm. The Reverse Mortgage insurance protects you against financial harm. It protects you in case the lender should fail, but it also helps to protect you from foreclosure. A government-sponsored program supports the insurance.
Why are interest rates so low for a Reverse Mortgage?
It is amazing; right now, an average American retiree can borrow money for less than General Motors! Interest rates are high when the lender has a significant risk of losing the money such as in the case of payday loans or bail bonds. In the case of the Reverse Mortgage the lender is sure to get the money back. This is mostly because the government (and the lender) require that many steps be taken ahead of time to ensure that the home is in good condition. This is also because of the mortgage insurance.
Thus, the rather high closing costs result in a very low interest rate.
Does a Reverse Mortgage give me absolute protection against foreclosure?
People don’t go into foreclosure because of a Reverse Mortgage. If there is foreclosure, it is despite a Reverse Mortgage. You remain the homeowner and are still liable for expenses related to the home, such as taxes. A Reverse Mortgage can provide liquidity to cover these expenses.
Whom should I consult with?
Consult with people you trust. Involve your family and children. If you have a financial planner, tax advisor, or legal advisor get them involved.
Are there some lenders or brokers who are better to work with?
A Reverse Mortgage from every legitimate lender or broker gives you the same protection and safety. Although there may be differences in fees, they are generally minor between different lenders and brokers.
Work with somebody you trust-- with somebody who answers all your questions.
Is there a quality seal for lenders and brokers?
If there is such a seal, it is membership to NRMLA. NRMLA is the governing organization of the Reverse Mortgage Industry. It requires its members to follow a high code of conduct.
What do I have to do to get a Reverse Mortgage?
You should contact a lender or broker. They can help you through the process.
How quickly can I get a Reverse Mortgage?
Closing a Reverse Mortgage is not a drive-through process. It is difficult to estimate how long it will take to close a Reverse Mortgage. Expect somewhere between two weeks and three months. Your lender or broker may give you a more accurate forecast.