Seniors Center
Reverse Mortgages
Seniors who need or want to can take their cash equity invested in their homes in the form of a Reverse Mortgage. Understanding the process and how it affects you and your home is the first step towards determining if this type financing is right for you and your family. We hope the following questions will guide you through the process and help answer any questions you have about Reverse Mortgages.
As a senior what are the benefits of a Reverse Mortgage?
- The Reverse Mortgage customer always retains ownership and lives in their home
- Cash advances can be used for any purpose
- Loan proceeds are not considered “income” and do not affect Social Security, Medicare, SSI or Medicaid benefits
- The heirs can keep the home once the Reverse Mortgage is repaid.
What are my interest rate options?
The Reverse Mortgage is an adjustable-rate loan linked to the one-year U.S. Treasury Security Rate; any adjustment in the rate has no effect on the amount of the number of loan advances the customer can receive, but causes the loan balance to grow at a faster or slower rate.
Should I be concerned about any caps on the interest rate?
Yes. On the monthly adjusting HECM, the cap is 10 points over starting rate, for example, if your initial rate at the time of closing was 4.00%, the most your rate can ever be is 14.00%.; on the annually adjusting HECM, the cap is 2.00% per year, and 5.00% over the life of the loan.
How about interest rate adjustments?
The adjustments are monthly or annually, depending on which product one chooses.
Are there any tax-free* cash options?
Lump sum advances make cash immediately available; tenure plans provide fixed, monthly cash advances; line of credit makes cash available upon request.
Will I be responsible for closing costs involved with a Reverse Mortgage?
Yes, there are closing costs, but they can be financed into the loan. These may include an origination fee, title insurance, appraisal, a mortgage insurance premium and attorney fees. Typically, the out-of-pocket expense totals only about $300. The customer is expected to continue maintaining the property, paying the real estate taxes and hazard insurance premiums.
When is the loan repaid once it is established?
A Reverse Mortgage is due and payable when the property is no longer considered the customer’s principal residence; the loan must be repaid in one payment –either from the sale of the home or through other resources.
What are my options for Reverse Mortgage payments I can receive?
You can receive the money in any of four ways: monthly payments for a set number of years or for life; a lump sum, for all or part of the total amount with balance in monthly payments; a line of credit for the loan amount, to be drawn when you need it; or a combination of the payments methods.
Who owns title to the home while the Reverse Mortgage debt is outstanding?
The homeowner retains title throughout the life of the reverse Mortgage. Once the homeowner permanently vacates the home or it passes to your estate, the loan must be repaid.
What are my responsibilities after I receive the Reverse Mortgage?
There are three things the homeowner must do: maintain the property in good condition, keep the homeowners insurance and real estate taxes current.
Would I be limited on the use of the money?
The funds can be used at the homeowner’s discretion. Some have used the funds to pay for things such as home improvements, medical expenses, long-term care insurance premiums, in-home health care, vacations, new automobiles, pre-need expenses, to pay credit card debt and eliminate mortgage or home equity payments.
Can I assume this is safe for seniors?
Yes and here is why:
- The program is administered and regulated by the FHA
- The FHA guarantees you will receive your payments
- The repayment amount of the loan will never exceed the value of the house.
- You can never be forced out of your house
- FHA regulations require you meet with an independent credit counselor prior to loan being approved
Should I counsel a lawyer to apply for a Reverse Mortgage?
Legal counsel is not required. However, it is encouraged that seniors seek the advice of a legal, tax or financial advisor before committing to a Reverse Mortgage.
Under what conditions would a lender force a repayment?
Reverse Mortgage lenders can require repayment if the senior fails to pay their property taxes; fails to maintain or repair their home or fails to keep the home insured. These are fairly standard “conditions of default” on any mortgage. On a Reverse Mortgage, however, lenders generally have the option to pay for these expenses by reducing loan advances and using the difference to pay these obligations. This is only an option, if the senior has not used all of the available loan funds.
Would a senior consult their children or a family member before making a decision about a Reverse Mortgage?
The senior should consult with anyone they trust. They should also feel free to have these people attend appointments with them. Depending on the situation and what the homeowner is trying to accomplish, their advice and support could be helpful.
How would a Reverse Mortgage get passed to my heirs?
Once your home is passed to your heirs, the Reverse Mortgage comes due. Your heirs may either pay the balance due on the reverse Mortgage and keep the home, or sell the home and use the proceeds to pay off the Reverse Mortgage. If they sell the home, they get to keep any excess sales proceeds.
Can any lender provide me with a Reverse Mortgage?
No. Reverse Mortgages are specialized programs for the senior, 62 and older, and lenders must be approved by HUD and the FHA
What is the start to finish time involved when getting a Reverse Mortgage?
Generally, from start to finish, it is about four weeks. The process is pretty straightforward – homeowner take counseling, makes application and the appraisal is ordered. Once the appraisal is done, the homeowner can find out how much they would be able to receive through the Reverse Mortgage program. If all this meets the homeowner’s approval, the lender processes the paperwork, title, survey etc. and arranges for the closing.
Who provides the Counseling?
Counseling is done by a HUD certified counselor and the aspects of the loan are covered to make sure that the senior understands and can afford a Reverse Mortgage since the income and debt ratios are not used.
If I just want to get a Reverse Mortgage to make a line of credit available to me in the event I need or want to use it, and do not draw on it for any length of time, what are the costs?
There is no amount limit on what you can, or have to draw from you line of credit. If you do not need it, it will remain in tact and will continue to grow in value at the same rate of appreciation that your home appreciates. This line of credit still represents equity in your home.
The only ongoing costs associated with the loan would be the annual mortgage insurance premium- equal to on-half percent of the mortgage balance per year and is added to the reverse Mortgage balance, the monthly servicing fee, and the interest charged to the loan. You are not charged interest on the unused funds remaining in the line of credit. Interest is only calculated on the amount withdrawn plus fees. In addition, under the HECM program the unused funds grow at the specified growth rate allowing you more access to your home’s equity.