A reverse mortgage enables older homeowners (62+) to convert part of the equity in their homes into tax-free cash 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 (or one lump payment) to you. Below are some common questions asked by consumers about reverse mortgages.
How Much Money Can I Get?
The amount of funds you are eligible to receive depends on your 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 your area. In general, the older you are and the more valuable your home (and the less you owe on your home), the more money you can get. As a rough estimate, if the youngest borrower is 62, you would get about 62% of the value of your home, minus loan costs and paying off any current mortgage. If you are 72, it's about 68%, if you are 82 about 73%, and if you are 92 about 77.6%.
Does My Home Qualify?
Eligible property types include single-family homes, 2-4 unit properties, manufactured homes (built after June 1976), condominiums, and townhouses, and the home must be your primary residence. In general, cooperative housing is ineligible. See the section on "Types of Properties Allowed" for a more in-depth look at this question.
What are My Payment Plan Options?
My Understanding is that the Unused Balance in the Line of Credit Option Has a Growth Feature. Does that Mean I'm Earning Interest?
No, you're not earning interest like you do with a savings account. The growth factor, which is equal to roughly the interest that you're being charged, takes into consideration that your home has appreciated in value over the past 12 months and that you are one year older.
How Can I Use the Proceeds from a Reverse Mortgage?
The proceeds from a reverse mortgage can be used for anything, whether it's to supplement retirement income to cover daily living expenses, repair or modify your home (i.e., widening halls or installing a ramp), pay for health care, pay off existing debts, buy a new car or take a "dream" vacation, cover property taxes, and prevent foreclosure.
How Does the Interest Work on a Reverse Mortgage?
With a reverse mortgage, you are charged interest only on the proceeds that you receive. Reverse mortgages may have a fixed interest rate, or they may charge a variable interest rate that is tied to an index, such as the 1 month London Interbank Offered Rate (LIBOR), plus a margin that typically adds an additional two to four percentage points onto the rate you're charged. Interest is not paid out of your available loan proceeds, but instead compounds over the life of the loan until repayment occurs.
Are There Any Special Requirements to Get a Reverse Mortgage?
Generally speaking, as long as you own a home, are at least 62, and have enough equity in your home, you can get a reverse mortgage. This is to say that any income or credit requirements are minimal, and there are no medical or health requirements. Of course there are exceptions. For example, if you live in a condo where the project is not FHA approved, and for some reason you are unable to get it FHA approved, you will not qualify for a reverse mortgage.
What If I Have An Existing Mortgage?
You may qualify for a reverse mortgage even if you 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. You can pay off the existing mortgage with a reverse mortgage, money from your savings, or assistance from a family member or friend.
For example, let's say you owe $100,000 on an existing mortgage, and based on your age, home value, and interest rates, you qualify for $125,000 under the reverse mortgage program. Under this scenario, you will be able to pay off ALL the existing mortgage and still have $25,000 left over to use as you wish.
If, however, you only qualify for $85,000, then you would need to come up with $15,000 from your own savings to get the reverse mortgage. Even then, all the money from the reverse mortgage will have been used to pay off the existing mortgage, so you will not receive any lump sum or monthly payments. On the other hand, you won't have a monthly mortgage payment anymore.
If you find yourself in a deficit situation where you don't have enough money to pay off the existing mortgage, you may use funds from a grant or gift from a family member or friend to cover the gap, but you cannot incur a new debt obligation (i.e., loan).
What is a Monthly Servicing Fee, and is it Charged on Every Reverse Mortgage?
Depending upon which product you select under the FHA HECM program, you may be charged a monthly servicing fee that ranges from $30 - $35 monthly. This fee covers the expense of the ongoing servicing of your reverse mortgage.
The Servicing Fee Set Aside (SFSA) is an estimate of what the total servicing fees will be over the life of the loan. It is calculated using your life expectancy (converted from years into months) and the amount of monthly servicing fee. This amount is not considered a closing cost and is not part of your initial loan balance, rather it is simply set aside from funds availble to you, and then charged to your monthly loan balance at the rate equal to your monthly servicing fee amount.
Some HECM products have no monthly servicing fee and no servicing fee set aside. Please consult with your lender or HUD-approved reverse mortgage counselor to obtain additional information to this particular feature of the HECM product.
Will I Lose My Government Assistance If I Get a Reverse Mortgage?
A reverse mortgage does not affect regular Social Security or Medicare benefits. However, if you are on Medicaid, any reverse mortgage proceeds that you receive must be used immediately. Funds that you retain would count as an asset and could impact Medicaid eligibility. For example, if you 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 your 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, you would be ineligible for Medicaid. To be safe, you should contact a Medicaid expert or financial advisor.
Why Do I Need to Get Counseling?
Counseling is one of the most important consumer protections built into the program. It requires an independent third-party to make sure you understand the program, and review alternative options, before you apply for a reverse mortgage.
You can seek counseling from any HUD-approved counselor or counseling center. Counseling is required for all reverse mortgages and may be conducted face-to-face or by telephone. Depending on government funding available to defray costs, the counseling may be free or may cost up to a maximum of $125.
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.
When Do I Pay Back My Loan?
No monthly payments are due on a reverse mortgage while it is outstanding. The loan is repaid when you cease to occupy your home as a principal residence, whether you (or the last remaining spouse, in the case of a couple) pass away, sell the home, or permanently move out. The amount owed can never exceed the value of your home. This means that if the value of the home is less than the balance of the loan, the FHA insurance kicks in and makes sure the lender gets paid in full. If your heirs want to keep the property and they qualify for a loan, then the balance can be paid with a refinance. Of course, if the home is sold and the sales proceeds exceed the amount owed on the reverse mortgage, the excess money goes to you or your estate.
Under What Circumstances Should I Not Consider a Reverse Mortgage?
Because of the upfront costs associated with a reverse mortgage, if you intend to leave your home within 2-3 years, there may be other less expensive options to consider. You might look at home equity loans, or no-interest loans or grants that may be offered by your county government or a local non-profit to repair your home. There may be a tax deferral program available, if you're having problems paying your property taxes. Also, if you want to leave your home to your children, then you should consider other options, because in many cases, the home is sold to pay back a reverse mortgage. If only one of you qualifies by age, that's another situation where you will want to think hard about whether to do the reverse mortgage. If the one on the loan predeceases the younger one who is not on the loan, now the loan becomes due and payable. If the surviving spouse doesn't want to continue to live in that home anyway, and there are other living options available, then there's no problem. See the FAQ below on this issue for more analysis.
What Kind of Interest Rate Can I Expect?
Current HECM Standard Fixed rates are in the 4.25% to 5.75% range, and HECM Saver Fixed rates are in the 4.25% to 6.0% range. FHA will also calculate your "effective rate," meaning adding the annual mortgage insurance (MI) into the mix. The annual MI is 1.25%. So if your note rate is 4.5% the paperwork will list your effective rate as 5.75%.
For Standard Adjustable Line of Credit/Monthly Income, rates are usually tied to the 1 Month Libor index, which is less than .2%. To this is added a margin, in the 1.75 to 3.25 range. So let's say the index is .2 and your margin is 2.5, your rate would be 2.7%. FHA will also calculate your "effective rate," meaning adding the annual mortgage insurance (MI) into the mix. The annual MI is 1.25%. So if your note rate is 2.7%, the paperwork will list your effective rate as 3.95%. FHA will also calculate the "expected rate." This is the anticipated average rate that the loan will see over its lifetime. It is on THIS rate, rather than your initial rate, that FHA will calculate what you qualify for. If your note rate is about 2.7%, the expected rate will be about 5.57%. There is a limit as to how high your adjustable rate can go, which is 10% above the initial rate. If your initial note rate is 2.7%, your rate cap is 12.7%.
How Does the Interest Rate Affect What I am Eligible to Receive?
The current "floor" rate as far as HUD is concerned is 5.06%. This means that you don't qualify for more money if you get a lower rate than that, though the lower rate will make a substantial difference in your amortization over time. A lower rate means less interest is being accrued, which means your principal balance goes up more slowly. If you take a rate higher than 5.06%, you will qualify for less money, because of the greater amount of interest being accrued.
If you choose an adjustable rate HECM, the amount you qualify for will be based on the "expected rate" rather than your initial rate. The expected rate is the estimated average rate for the lifetime of the loan, and this will usually be higher than the fixed rate option would be. This is why the adjustable rate option will typically get you less money.
What If Only One of the Couple Qualifies by Age?
The rule for the reverse mortgage is that when the last person on the loan passes away or permanently leaves the home, the note becomes due and payable. When both spouses are on the reverse mortgage, and one passes away, nothing changes for the surviving spouse. He or she can continue to live in the home and the loan continues as before. If only one of the spouses is on the loan because the younger one was not yet 62 when the loan was begun, now the loan is due and payable if the older spouse passes away.
This presents two problems. If the surviving spouse who was not on the loan wants to continue to live in the home, they must find the money to pay off the loan, either through a refinance or through accessing some other assets. For a few years, there was uncertainty about whether the FHA insurance would protect if the surviving spouse or family wanted to keep a home that was upside down in value. In that situation it appeared that the spouse/family must pay off the entire balance, regardless of current value. The AARP filed a lawsuit against HUD in March 2011 on just this issue, saying this puts undue burden on the surviving family or spouse, and HUD finally responded in July 2011 with a clear statement that the surviving spouse or family would be protected. See the "News" section of this site for the article on the AARP suit for further details. However, there are still issues to consider if only one spouse is on the loan.
There are several solutions to having only one of the couple on the loan:
1. Take out life insurance on the older spouse so that should they pass away, there would be enough money for the surviving spouse who's not on the loan to pay off the balance and continue living in the home. This can be an expensive option, especially if the older spouse has existing health challenges.
2. Go into the loan with the understanding that should the older spouse predecease the younger one, the younger one will sell the home and move to a new location. For many people, this is what the surviving spouse would want to do anyway. The current home may be too big, require too much upkeep, etc, for the remaining person to handle. However, this choice assumes that there will be a suitable housing option available, even if the sale of the house provides no net cash.
3. Plan for the couple to refinance into a new reverse mortgage when the younger spouse becomes eligible. However, this assumes that the reverse mortgage program will still be available at that future date, that their situation will still meet guidelines, and that both spouses will still be alive. What if the younger spouse is not yet 62 when the older spouse on the loan passes away, and the younger spouse cannot qualify for a regular refinance to retain the home?
In short, there is no care-free solution to this issue, and this doesn't even touch on the ramifications of the younger spouse being off title when the older spouse passes away, something that should be discussed with a qualified attorney. If the younger spouse is clear that they don't want to continue living in the home if the older one passes away, and if there is no question about the housing situations available to the younger spouse should that come to pass, then sure, go ahead. Otherwise, do not proceed with a reverse mortgage in this situation unless the need is very great and you have exhausted other options.
Why Is My HECM Line of Credit Increasing?
The Line of Credit option for reverse mortgage is designed to automatically adjust over time for entitled benefits. In a traditional line of credit, you can't come back to the lender a few years later and say, "I'm older now I deserve a larger credit limit," but that's exactly what happens with a reverse mortgage, and you don't even have to ask for it. The credit limit increases every year, not because you are earning interest (which you are not), but because you are another year older and thus qualify for more under HECM guidelines. Further, the government assumes an annual increase in property value, so this also contributes to the calculation. Typically the available credit will increase at 1/2% above the interest rate.
Why Are There Two Deeds Recorded on My Home at Much Higher Amounts Than I Received?
Almost everything about a reverse mortgage is different than we are used to with regular forward mortgages, and this is another great example. There are always two deeds recorded, one in the name of the lender and one in the name of the Secretary of the Department of Health and Urban Development (HUD). This is because HUD is backing the loan with insurance, and should something happen to the servicing lender, the additional deed protects HUD's interests. Both deeds relate to a single note, which is the reverse mortgage that you signed.
The amount listed on those deeds is different than the amount you signed for because the reverse mortgage has no amortization feature at all. The lender and HUD have no idea what the balance of the loan will be at termination. To address this issue, the HUD rule is to list the note amount at 150% of the maximum claim amount or property value, whichever is less.
How Long Does the Estate Have to Settle the Debt After the Borrower Passes Away?
Technically, section 24CFR206.125(a)(2) states that the mortgagor has 30 days to settle the debt before a foreclosure proceeding is begun. However, for all practical purposes, the time frame is longer than that. HUD issued Mortgagee Letter 2005-30, dated July 12, 2005, which stated that mortgagees (lenders) are required to commence foreclosure within 6 months of giving notice that the mortgage is due and payable, or within 6 months of the date of the mortgagor's death, if applicable. An FAQ released by HUD on September 24, 2010 stated that borrowers expecting a 6 month leeway were sometimes alarmed to receive a Notice of Intent to Foreclose (NOI) within 3 months. This sometimes happened because of certain state disclosure requirements, and HUD's response in this FAQ was to tell the lenders to give an automatic servicer "extension" of 90 days if necessary to avoid this issue. The intent, per the FAQ, is "to allow the mortgagor or their estate the full six months (plus any additional time approved under the regulations) to market the property, and then have sufficient time to perform the required notifications and meet the first legal deadline for the jurisdiction as established in Mortgagee Letter 2005-30." An FAQ released on February 19, 2009, says that HUD is able to grant 2nd and even 3rd extensions to allow more time for the estate to sell the property.
How Would a Lender Know If the Borrower is No Longer Occupying the Property?
HUD requires lenders to exercise reasonable diligence to verify that the borrower is occupying the property as required by the terms of the loan. HUD's standard for this is to have the lenders send to the borrower at least once a year a card where they confirm occupancy and sign and return. The lender may also monitor a Social Security database of death records and match against loan files.