What is a Reverse Mortgage?

Property Appraisal

A reverse mortgage is a loan available to people over 62 years of age that enables a borrower to convert part of the equity in their home into cash.  Reverse mortgages were conceived as a means to help people in or near retirement and with limited income use the money they have put into their home to pay off debts (including traditional mortgages), cover basic monthly living expenses or pay for health care.  There is no restriction on how a borrower may use their reverse mortgage proceeds.

The loan is called a reverse mortgage because the traditional mortgage payback stream is reversed.  Instead of making monthly payments to a lender (as with a traditional mortgage), the lender makes payments to the borrower. The borrower is not required to pay back the loan until the home is sold or otherwise vacated.  As long as you live in the home, you are not required to make any monthly payments towards the loan balance, but you must remain current on your tax and insurance payments.

Features of Reverse Mortgages

With a reverse mortgage, you always retain title to or ownership of your home. The lender never, at any point, owns the home even after the last surviving spouse permanently vacates the property. The amount of funds you receive depends on the age of the youngest borrower, the value of the home, the interest rate and upfront costs. The older you are, the more proceeds you can receive.

The funds can be delivered to you as a lump sum, as a line of credit or as fixed monthly payments, either for a fixed amount of time or for as long as you remain in the home. You can also combine these options, for example, taking part of the proceeds as a lump sum and leaving the balance in a line of credit.  Fees can be paid out of the loan proceeds. This means you incur very little out-of-pocket expense to get a reverse mortgage. Your only out-of-pocket expense is the fee for a property appraiser and a property appraisal and maybe a charge for counseling depending on the counseling organization you work with. Abbe Edleman is an expert in the area of appraisals and appraisers. Together, these two fees will total a few hundred dollars. Very low-income homeowners are exempted from being charged for counseling.

Your final loan balance is comprised of the amount borrowed, plus annual mortgage insurance premiums, servicing fees and interest. The loan balance grows as you live in the home. In other words, when you sell or leave the house, you owe more than you originally borrowed. Look at it this way: A traditional mortgage is a balloon full of air that loses some air and gets smaller each time you make a payment. A reverse mortgage is an empty balloon that grows larger as time passes.

With a Home Equity Conversion Mortgage or HECM, the government insured reverse mortgage option, no matter how large the loan balance, you never have to pay more than the appraised value of the home or the sale price. This feature is referred to as non-recourse. If the loan balance exceeds the appraised value of the home, then the federal government absorbs that loss. The government pays for it with proceeds from its insurance fund, which you as a borrower pay into on a monthly basis.

Cautions

As with any financial transaction– be it a mortgage, a credit card or even a bank account– there are specific rules and obligations attached to reverse mortgages. Some of them are unique to this particular financial product. You may be accustomed to such items being buried in fine print. With reverse mortgages, both loan officers and counselors will explain these specifics to you as part of the loan process.

Among the rules and obligations you need to be aware of are:

• Everyone listed on the deed of a home owned by someone seeking a reverse mortgage must be over 62 years old;

• If your husband or wife, for instance, is under 62, their name cannot be on the title if you want to qualify for a reverse mortgage. Names can be added or removed from titles;

• If a name is removed from a title, that person is no longer an owner of the home. When the person whose name is on the deed passes, the surviving spouse or the heirs are responsible for paying back the reverse mortgage loan. The loan can be repaid out of other resources or by selling the home. If there is a balance from the sale of the home after the reverse mortgage is paid, it belongs to the heirs;

• A reverse mortgage must be the only lien on a property. This means, in order to obtain a reverse mortgage you must pay off any existing traditional mortgage. You can use your reverse mortgage proceeds to pay off your traditional mortgage;

• A reverse mortgage holder is responsible for staying current on their real estate taxes and homeowner’s insurance. If you go into arrears, you take the risk of being forced into default;

• A reverse mortgage holder is responsible for maintenance of the home;
• The home must be your primary residence, which means you must live there more than 183 days a year;

• You are only permitted to live out of your home for a total of twelve months. This means, if you find yourself in, say, an extended care situation, or on an extended out-of-town work situation, you must approach your lender and discuss;

• Loan originators are not permitted to require that you purchase other financial products (i.e., annuities, long term care insurance) as a condition for getting a reverse mortgage. If they do, you should report this to HUD or NRMLA.