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Primer on Reverse Mortgages

Reverse mortgages have come a long way since their inception in 1989. For most of their 25+ year existence, reverse mortgages have been seen in a mostly negative light. Somehow, it became a widespread belief that a reverse mortgage meant you gave up ownership of your home.

Fortunately, over the years, lawmakers have implemented several changes to the way reverse mortgages operate that make them substantially safer and more beneficial to the borrower.

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Basic Facts About Reverse Mortgage

Reverse Mortgage allows homeowners over the age of 62 to safely borrow against the home equity in their home.

More importantly, a reverse mortgage does not have to be repaid until you move out, sell your home, or pass away. At that time, your heirs or trustee estate has approximately 1 year to sell or refinance your home to pay off the balance and the remaining equity is distributed according to your will or living trust.

Should your home sells for less than the balance owed on your reverse mortgage, the deficit is forgiven.

The funds that you borrow are tax-free, and you may use them any way you wish. You can receive your funds in a lump-sum, or monthly payment. You can even use these funds as a line-of-credit with an annual growth rate.

The federal government has instituted checks and balances to make sure the potential borrower has made an informed decision prior to obtaining a reverse mortgage. A borrower must receive reverse mortgage counseling with a HUD-approved reverse mortgage counselor. This safeguard insures senior citizens against unscrupulous lenders.

Typically, a reverse mortgage allows you to access from 55% to 60% of the value of your home. The specific amount is based upon the age of the youngest borrower, the value of your home, and the interest rate at the time you begin your reverse mortgage.

Frequently Asked Questions

What is a Reverse Mortgage?

A reverse mortgage is basically the same as a regular mortgage with one important exception: With a regular mortgage, you make a monthly payment. That payment typically repays some of the interest the loan has accrued, and, eventually, it pays down the principal amount you borrowed. With a reverse mortgage, you do not make a monthly payment. Rather, you make one final payment upon the maturity of the loan.

How, Specifically, Does a Reverse Mortgages Work?

The most popular type of reverse mortgage is known as a HECM (Home Equity Conversion Mortgage), and is backed by the Federal Housing Authority, or FHA, and is federally insured.

HECMs allow a homeowner or homeowners, aged 62 and older, who either own their home outright or have a small existing mortgage, to borrow money against the equity of their home. The borrower must occupy the home. Incidentally, up to four unit homes qualify, so long as at least one unit occupied by the borrower.

During the life of the loan, you are still obligated to continue paying your property taxes, homeowners' insurance, and maintenance costs.

There are limits to how much a person can borrow using a HECM. A person can only take up to the FHA HECM mortgage limit of $625,500. In most cases, a borrower will qualify for a reverse mortgage of approximately 55 to 60 percent of the homes value, or $625,500, whichever is greater.

Can I Lose My Home?

Yes. There are three ways you can lose your home:

  1. You are required to stay current on your property taxes. If you failed to do so, the HECM lender can foreclose. Of course, that scenario may be academic, since the tax collector would probably have already seized your home for non-payment of back taxes
  2. You are required to maintain your Homeowner’s Insurance policy. If you failed to do so, the HECM lender can call the loan and foreclose, if unpaid;
  3. You are required to maintain your home to a reasonable standard. If you allow your home to become dilapidated or in serious disrepair, the HECM lender can call the loan and foreclose, if unpaid;

As long as you satisfactorily maintain the three requirements listed above, you can stay in your home as long as you want!

How Much Money Can I Expect To Receive From My Reverse Mortgage?

The amount of money you can expect to receive from a reverse mortgage depends on several factors.

The major components are your age, value of the home and the length of the loan. If there are two people listed on the mortgage, then the age of the youngest borrower is used. The current interest rate, initial mortgage insurance premium, closing costs and repair costs can also play a role in determining the monthly amount that you can expect to receive. While there are exceptions, generally, a HECM reverse mortgage will work out to approximately 55-60% of your home’s value.

How Do I Receive the Proceeds From My Reverse Mortgage?

You can elect to receive equal monthly payments, as long as at least one borrower is living and continues to occupy the property as the principal resident, or;

You can take unscheduled payments, in varying amounts, based upon your needs, until the loan is exhausted, or;

can take a single, lump sum payment when the loan is closed.

Can A Reverse Mortgage Loan Balance Ever Exceed The Value of My Home?

No.

Reverse mortgages are FHA backed loans. As such, they require a lenders to mortgage insurance premium.

If you withdraw less than 60 percent of the available loan amount, during the first year, the mortgage insurance premium is just 0.5 percent of the maximum claim amount. If you take over 60 percent, the mortgage insurance premium increases to 2.5 percent.

While this mortgage insurance premium may seem like a costly expense, it is actually a very important and worthwhile insurance policy for the you, the borrower. This mortgage insurance premium insures that any negative equity that may result from your reverse mortgage is forgiven. Putting it another way, you, or your heirs, will never be required to pay back more than the value of your home, even if your loan balance greatly exceeds the value of your home.

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  • HUD Disclaimer:This material is not from HUD or FHA and has not been approved by HUD or a government agency.