For years, reverse mortgages were seen as a last resort for seniors looking for help with retirement expenses. But in 2017, the U.S. Department of Housing and Urban Development made changes to the rules around reverse mortgages to offer more rights and protections to the spouse of a borrower who takes out a reverse mortgage.
A reverse mortgage is a loan that lets you turn the equity you have in your home into a single payment or monthly payments that you receive while you continue to live in your home. You typically pay back the loan when you sell the home, or your heirs do after you die.
Reverse mortgages can be an important source of funds. For the average American, the house represents about two-thirds of their net worth, says Shelley Giordano, co-founder with Torrey Larsen, president of Mutual of Omaha Mortgage, of the University of Illinois Academy for Home Equity in Financial Planning.
This article specifically addresses the type of reverse mortgage known as a home equity conversion mortgage, or HECM. This is the technical term for reverse mortgages that are offered though institutions approved by the Department of Housing and Urban Development and insured by the Federal Housing Administration. HECMs account for the lion’s share of reverse mortgages, according to Giordano.
Both traditional loans and reverse mortgages allow you to borrow money using your home as collateral, and you retain the title to your home. But reverse mortgages have several important distinguishing characteristics. Here are five of them.
1. A reverse mortgage turns the equity you have in your home into cash
With a traditional mortgage, you receive a lump sum from a lender to buy a house. You pay back the loan in regular installments over a set number of years. Your equity in the home increases over time, so the longer you own the home, the more you’ll get to keep when you sell the house.
With a reverse mortgage, the lender is giving you a partial advance on how much you’d get to keep if you sold the house. After paying off the remaining amount of the traditional mortgage, many people choose to receive the proceeds in a lump sum or regular payments. You continue living in your home, and as long as you’re there, you don’t need to make payments on the loan. But you’re still responsible for property taxes, homeowners insurance and upkeep of the home.
Use Mutual of Omaha’s reverse mortgage calculator to forecast how much you might be able to receive.
2. You can receive the money from a reverse mortgage as a lump sum, monthly payments, a line of credit or a combination of the three
You can also maintain the reverse mortgage loan as a line of credit to draw on when needed or combine monthly payments with a line of credit. If you choose to receive monthly payments, you can receive them either as an annuity that lasts as long as the home is your primary residence, or for a set term, such as 10 years.
You can use the funds any way you want. How much you receive from the lender depends mainly on:
- Your home’s current market value
- How much is left on your traditional mortgage
- Your age
You’ll generally receive more in reverse mortgage proceeds the higher your home’s market value, the lower your remaining mortgage balance, and the older you are.
3. There are minimum age and loan balance requirements
The minimum age for an HECM is 62. That’s because these loans were designed for seniors. Reverse mortgages are only for your primary residence, not for vacation or second homes. The other main requirement is that the loan balance needs to be low enough to be paid off from the reverse mortgage proceeds.
A licensed reverse mortgage provider can detail any other requirements.
4. You repay your reverse mortgage when the home is no longer your primary residence because you’ve chosen to move or you’ve died
People or their heirs often sell the home to repay the loan. Unlike conventional mortgages, which have payment terms for a set number of years (15 or 30, usually), reverse mortgages are for an indeterminate time.
Your reverse loan balance increases over time, as interest on your loan and fees will accumulate, just as with a conventional mortgage. But you’ll never owe more than the home’s value when the loan becomes due. FHA-insured reverse mortgages are non-recourse loans, meaning the lender can’t demand more than the value of the loan’s collateral — your home, in this case.
5. Reverse mortgages have possible drawbacks
One of the potential disadvantages is that the fees can be higher than for a conventional mortgage.
Besides the interest, you’ll need to pay closing costs (which can be included as part of the loan) and an upfront mortgage insurance premium, as well as an annual mortgage insurance premium, loan origination fee and other costs. The costs might not be worth it to you if you’re only going to stay in the home for a few years, Giordano says.
You also might not be able to pass the home along to your heirs. Reverse mortgages are usually paid by selling the house. Your heirs could keep the home in the family by buying it, however.
To learn more about reverse mortgages, read Is a Reverse Mortgage Right for You? Four Questions to Help You Decide.
DISCLOSURE Mutual of Omaha Mortgage, NMLS ID 1025894. 3131 Camino Del Rio N Suite 1100, San Diego, CA 92108.
Charges such as an origination fee, mortgage insurance premiums, closing costs and/or servicing fees may be assessed and will be added to the loan balance. As long as you comply with the terms of the loan, you retain title until you sell or transfer the property, and, therefore, you are responsible for paying property taxes, insurance and maintenance. Failing to pay these amounts may cause the loan to become immediately due and/or subject the property to a tax lien, other encumbrance or foreclosure. The loan balance grows over time, and interest is added to that balance. Interest on a reverse mortgage is not deductible from your income tax until you repay all or part of the interest on the loan. Although the loan is non-recourse, at the maturity of the loan, the lender will have a claim against your property and you or your heirs may need to sell the property in order to repay the loan, or use other assets to repay the loan in order to retain the property.
These materials are not from HUD or FHA and the document was not approved by HUD, FHA or any Government Agency.
Subject to Credit Approval. www.nmlsconsumeraccess.org