Reverse Mortgages

A reverse mortgage is a special type of home loan that allows homeowners age 62 or older to replace their existing loan with a reverse mortgage. Usually no monthly loan payments will be made while you live in the property.

If you do not have a loan, a reverse mortgage will be a new loan, and possibly provide a source of cash or income, with no monthly loan payments while you live in the property.

This is a way to convert your home’s equity into cash or monthly income without having to sell your home.

The most common reverse mortgage is known as a Home Equity Conversion Mortgage (HECM). These are insured by the Federal Housing Administration. This is an FHA loan.

How the money can be received

• A lump-sum payment, subject to HECM restrictions.
• Monthly payments for a specified period, or for as long as the homeowner continues to own the property. The lender does not become the owner.
• A line of credit.

Criteria

• This is only for owner-occupied property, not for rental property.
• The owner must be at least age 62 to get a reverse mortgage.
• The owner needs equity.

The basis of the loan is equity, not income or credit, which can be beneficial for someone who does not have the income or credit to get a traditional loan.

Owners who have limited or fixed income and cannot afford rising taxes, insurance and utilities can often stay in their homes with a reverse mortgage.

Questions

Who owns the house if you get a reverse mortgage?

The borrower remains the owner. The bank has a lien, and does not own the property.

When must the reverse mortgage be repaid?

There is no due date. The loan becomes due:

1. If the last surviving borrower dies.
2. If the homeowner sells the property.
3. If the homeowner permanently moves out, such as moving to another primary residence or a nursing home.
4. If the homeowner fails to meet loan requirements, including paying property taxes and homeowners insurance.

What happens to the interest?

The borrower does not make monthly principal or interest payments. Instead, interest is added to the outstanding loan balance.

How much money can you borrow?

The amount depends primarily on:

• Age: generally, the older the homeowner, the higher the percentage of home value that can be borrowed.
• Home value: higher-value homes generally support larger loans, subject to FHA limits.
• Interest rate: lower expected interest rates generally allow larger initial borrowing amounts.
• Existing mortgage: any existing mortgage must be paid off, reducing the cash available.

These are primary mortgages, not second mortgages.

Advantages and disadvantages

Options to a reverse mortgage

• Selling for cash
• Private loans
• Selling in a traditional process
• Refinancing with a traditional loan

If you are late on your mortgage payment, read the foreclosure information to see how much time you have. It is possible to delay foreclosure if the lender knows you have a plan, such as approval for a reverse mortgage.