Reverse mortgages have undergone many dramatic changes since 2012, and today, they are no longer the reverse mortgage they were a few years ago. Subsequently, the biggest challenge facing the reverse mortgage industry today is education. People need to educate themselves on how today’s reverse mortgage works. It has many “moving parts”, many features, that cause it to be a complex loan. On the other hand, those features allow it to be designed to fit an individuals needs. As such, and as a Reverse Mortgage Specialist, I understand them and am able to communicate how they work and structure the loan to maximize the benefits to the senior homeowner.
What is a Reverse Mortgage?
The Home Equity conversion Mortgage (HECM) is FHA’s reverse mortgage program. A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that you have built up over years of making mortgage payments can be paid to you in varying ways. However, unlike a traditional forward mortgage or a second mortgage, HECM borrowers do not have to make a mortgage payment until they no longer use the home as their principal residence or fail to met the obligations of the mortgage and trip a maturity event. Additionally, as of 2009, you can purchase a home using a reverse mortgage.
Who is Eligible for a Reverse Mortgage?
- You must be 62 years of age or older. For married couples, only one needs to be 62
- Occupy the property as your primary residence
- Have sufficient home equity or down payment in the case of a home purchase. General guideline is 50% equity or down payment
- Not be delinquent on any federal debt
- Have financial resources to continue to make timely payment of ongoing property charges such as property taxes, insurance and Homeowner Association fees, etc.
- Participate in a consumer information session given by a HUD-approved HECM counselor
Eligible Property Types:
- Single family home
- 2-4 unit home with one unit occupied by the borrower
- HUD approved condominium project
- Manufactured home that meets FHA requirements
Among the Benefits of a Reverse Mortgage:
Your retirement funds may come from savings, Pension, and/or Social Security. But now reverse mortgages are offering another source that may help fill or provide that additional retirement financial security. Some of the benefits include;
- Pay off an existing first mortgage, thereby increasing monthly cash flow for retirement by no longer having a principal and interest payment
- Avoid selling investments at a loss in a “down” market
- Establish a “stand-by” line of credit (LOC) that you can tap into as needed. Unlike a traditional Home Equity Line of Credit (HELOC), a reverse mortgage line of credit cannot be reduced or revoked, as long as the terms of the loan are met. And the unused balance of the LOC grows over time.
- Supplement retirement income with tax-free* funds
- Delay collecting Social Security, for a larger monthly benefit.
- Pay for medical or long-term care costs
- Finance the purchase of a more suitable home, with no monthly mortgage payments** However, you can make payments, whether interest only or pay down the principal and interest at anytime in future.
Why should you consider a reverse mortgage?
Senior homeowner’s obtain a reverse mortgage, use their home equity, to give them peace of mind, to help insure their quality of life, and to allow them stay in their home for as long as they like. Today’s reverse mortgage has, given a person qualifies, tremendous flexibility! And the proceeds are tax free*, allowing you to use the loan proceeds however you choose.
Given this understanding, why you would consider a reverse mortgage has many answers. Since an existing mortgage has to be paid off in order to obtain a reverse mortgage, the first answer to this question is how much not having a principal and interest payment benefit your retirement years? How much would it give you in additional monthly cash flow to fulfill the needs and/or goals you may have? Additional options may include taking a line of credit, monthly advances for a set period of time; a monthly stream of income for as long as you live in your home; a lump sum; or a combination of these options.
From paying off an existing mortgage and enjoying additional retirement cash flow to utilizing a reverse mortgage as part of a comprehensive retirement plan, again, the options are vast. This is why and when you meet with a reverse mortgage professional and perhaps a team of professionals, to determine not only the “why” you should consider a reverse mortgage but also structure one to best serve you in your golden years.
Purchase your home using a reverse mortgage?
Yes! This program is referred to as the “HECM for Purchase” or “H4P” program. HECM is HUD’s acronym for a reverse mortgage and it’s full name is Home Equity Conversion Mortgage. Since 2009, reverse mortgages can be used to purchase a home. The home needs to be your primary residence. It is also possible to build your new home and finance it with a reverse mortgage.
If you are looking to or interested in purchasing a home using a reverse mortgage, give me a call to discuss the details and to learn more. Using a reverse mortgage to purchase a home has additional rules that govern purchases. As such I can’t stress enough that you should ONLY deal with a seasoned reverse mortgage professional if you are going to use a reverse mortgage to purchase a home.
Will We Have an Estate to Pass on to Heirs?
When the home is sold or no longer used as a primary residence, the HECM loan must be repaid. This is no different than having a traditional forward mortgage, as ANY mortgage would have to be paid at the time a home is sold. The caveat to the reverse mortgage is they loan needs to be paid when a maturity event occurs, such as it is no longer a primary residence. All proceeds beyond the amount owed on the HECM belong to the borrower / spouse or estate. This means any remaining equity can be transferred to the heirs. No debt is passed along to the estate or heirs. Also worth noting is that is a family member wishes to purchase the home, when, for example, the last parent passes away, they can for 95% of the appraised value, regardless of the value of the home.
Can I Sell My Home?
Yes and at anytime. The HECM loan does not have a pre-payment penalty nor a specific term. If a borrower chooses to sell their home at a future date, for example to downsize, the HECM loan must be repaid and then all proceeds beyond the amount owed belong to the borrower.
The Bank Owns My Home?
No and Never! However, just like a traditional first mortgage, there is a mortgage lien placed on the property and when the property is sold, no longer the primary residence, or fails to meet the obligations of the HECM, the lien must be paid.
What if I Owe More Than the Value of My Home?
The HECM is a FHA insured loan. And the HECM has a unique feature called a non-recourse feature. In the event the HECM loan balance exceeds the value of the home, the non-recourse feature insures the homeowner that they are not liable for the balance in excess of the value of the home. Additionally, the estate and heirs can not be held liable for the amount over the value of the home. This is potentially a huge feature! It guarantees that mom and dad will not pass on any debt to their heirs. It guarantees that the heirs will not inherit debt!
Again, reverse mortgages are complex and unique loans. As such, you should not rely on the advise of anyone that is not a dedicated reverse mortgage specialist. The information I have provided above is meant to be a high-level overview of the program. For your questions and to discuss your needs to see if a reverse mortgage is right for you, please contact me. I will work with you to educate you, and if you want to consider a reverse mortgage, I will structure a presentation specifically tailored to you and your needs.
- *Not tax advise. Consult a tax professional
- **If a borrower doesn’t meet loan obligations, such as keeping current with property taxes and required insurance, then the loan will need to be repaid.