A reverse mortgage enables older homeowners (62+) to convert part of the equity in their homes into tax-free income 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 to the senior.
The basics: “A no payment, home-equity loan for seniors.”
The basics explained: A mortgage is a mortgage is a mortgage. Everyone knows what a mortgage is; a person buys a house, finances it for 30 years, make payments, pay the property taxes & home-owners insurance. Sell the house at any time and pay back the lender. As an owner (with a lien, of course), one can modify the house, paint the walls odd colors, install funky carpet and maybe even install a swimming pool. A reverse mortgage is no different that the previously described, except one doesn’t make mortgage payments, and all borrowers must be age 62 or over. It’s that simple!
To qualify: Since the lender (per FHA) doesn’t require any monthly payments, income, assets, and credit score don't have much effect with the FHA reverse mortgage program. A senior just needs sufficient equity to qualify. Typically equity needs to be around 40% to 60% - depending on age and interest rates. Older borrowers need less equity as their life expectancy is shorter.
Interest rates: Currently the adjustable rate reverse mortgage is charging around 2.5%. A wholesale rate – if you will. The fixed-rate reverse mortgage is currently around 5.%. Since the lender is rarely at risk of a defaulted loan (i.e. no mortgage payments and FHA insures the loan from various defaults) the lender can charge lower interest rates than traditional mortgages. These interest rates are usually based on the LIBOR (an international index).
Payments: As mentioned before the senior doesn’t ever have to make mortgage payments to the lender for life (even if life is 50+ years more, or just 6 months – whatever “life” is) as long as the senior maintains the house to HUD standards, pays property taxes & home-owners insurance and lives in the property as their primary residence for more than one-half of each year.
Funds to senior: Since this is a mortgage in reverse the lender pays the senior. One can choose to receive the funds; all at once as a lump sum, fixed monthly payments, as a line of credit, or a combination of these. Since the funds are a loan, it is not considered income and thus doesn’t affect Medicare, Medicaid, or Social Security. Any existing liens or mortgage on the property must be paid at the time of closing of the reverse mortgage.
Safety and security: The Home Equity Conversation Mortgage (HECM) reverse mortgage is currently the only reverse mortgage available in the United States and it is fully FHA insured. What this means is; the FHA will protect the senior in several ways including; 1.) If the home’s value at the time of settlement is less than the amount owed the FHA will make up the loss (some restrictions apply of course). 2.) If the lender were to fail under the obligations of the contract, FHA will step-in to become the lender.
Reverse debt: Unlike traditional mortgages where the balance owed is always decreasing with every mortgage payment, the reverse mortgage has an increasing balance. In a normal economy the home usually increases in value and thus the home’s equity grows larger. With a reverse mortgage the loan balance increases but so does the home’s value increase, thus creating additional home-equity despite the ever-increasing loan balance. The way the reverse mortgage has been designed by the FHA, the heirs will still inherit at lot of home equity – in nearly all cases. Remember, the FHA will only allow about half of the appraised value to be borrowed – meaning the value of the home should always exceed the loan balance.
Disadvantages: Little to none for the client age 62+.
Disadvantages to heirs: The senior is “spending the kid’s inheritance”. But isn’t the home’s equity like an IRA that one pays into each year? Now it is time for the home to pay the senior - to enhance the golden years.
Costs: Most lenders charge an up-front fee of around $350 - a “deposit”, if you will. There is no application fee, no appraisal fee, per se. This deposit goes toward paying for some of the upfront costs to the lender such as a flood certificate and some toward the cost of the appraisal. Most other fees are added to the loan balance such as; title search & examination, title insurance, appraisal, local taxes, etc – normal costs for any traditional mortgage. Also HUD charges a 2% MIP fee. No where else can one get a no credit score, no payment home loan and still have such low interest rates.
Reverse mortgage for home purchase: Effective early 2009 realtors now use a reverse mortgage to help seniors purchase a home with a down payment of just 40% to 60% and the client never has to make a mortgage payment - for life. Benefits: 1.) consider increasing standard of living by purchasing a nicer home using a reverse mortgage 2.) The Realtor can assist by selling the current (older) home and help their client move into a more modern home, condo or even a maintenance-free townhouse. Realtors are eager to help as they get two-for-one; 1.) The listing and 2.) The sale of the newer home. Also remember that there is no income or credit requirement for the client (age 62+) to qualify – just the down payment of approximately 40% to 60% of the purchase price.