Housing and Community Development Department
Fair Housing - Avoiding Real Estate Scams - Reverse Mortgages
WHAT IS A REVERSE MORTGAGE?
A reverse mortgage is a special type of home loan that lets a homeowner convert a portion of the equity in his or her home into cash. Unlike a traditional home equity loan, cash-out loan or a second mortgage, no repayment is required until the borrowers no longer use the home as their principal residence. Actually, you receive money from the lender and generally do not have to pay it back for as long as you live in your home. You can either receive monthly payments or a lump sum as tax-free income.
What is equity?
Equity represents the difference between what the property is worth and what the owner owes against that property (i.e. the difference between the house value and the remaining mortgage or loan payment of a house.)
Can a lender take my home away from me if I outlive the loan?
No! Nor is the loan due. You do not need to repay the loan as long as you or one of the borrowers continues to live in the house and keeps the taxes and insurance current. You can never owe more than the home's value.
When I die will my kids get my home?
Your estate will repay the cash you received from the reverse mortgage, plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to your heirs. This debt is never passed along to your heirs.
What is the advantage of getting a reverse mortgage?
Reverse mortgages can help a homeowner who may be house rich but cash poor and it can offer a way to stay in your home and still meet all of your financial obligations. It allows you to convert part of the equity in the home into tax-free income without having to sell the home, give up title or take on a new monthly mortgage payment.
Who can qualify?
- Must be 62 years of age or older.
- Must own clear title to your property;
- Own your home outright; or
- Have a low mortgage loan amount (that can be paid off at closing with the proceeds from the reverse mortgage.)
What types of homes are eligible?
A single-family dwelling; or a 2 to 4-unit property that you own and live in; or a townhouse, detached home, or eligible condominium and/or manufactured home built after 1976.
What can I do with the proceeds?
- Supplemental retirement income
- Cover medical expenses
- Make home repairs and improvements
- Pay property taxes and insurance
- Pay for in-home care
- Reduce credit card debt
- Foreclosure prevention
- Grow an investment portfolio
- And more
How much can I get?
It depends on your age, current interest rate, other loan fees and appraisal value of the home or FHA's mortgage limits for your area, whichever is less. Generally, the more valuable your home is the lower the interest rate and the more you can borrow.
What are the types of reverse mortgages available?
- Single-purpose reverse mortgages
- Home equity conversion mortgages and
- Proprietary reverse mortgages
What are my payment options?
- Lump sum
- Fixed monthly payments; or
- Sometimes a combination of the two
The funds from a reverse mortgage are tax-free; it is your money, not additional income. A reverse mortgage does not affect regular Social Security or Medicare benefits. To assess the impact, if any, on other federal or state assistance or medical programs, you may wish to consult with your local Area Agency on Aging @ 800-677-1116, or a reverse mortgage lender or a tax attorney.
How do I repay the loan?
No monthly payments are due on a reverse mortgage while it is outstanding, the loan is repaid when you cease to occupy your home as a principal residence, whether you or the last remaining spouse in the case of couples passes away, sell the home, or permanently move out.
The amount owed can never exceed the value of your home. Furthermore, if the home is sold and the sales proceeds exceed the amount owed on the reverse mortgage, the excess money goes to you or your estate.
FEES ASSOCIATED WITH GETTING A REVERSE MORTGAGE:
What is an appraisal and how much does it cost?
A certified Appraiser will be used to determine the value of your home in order to calculate the amount you receive as a part of your reverse mortgage. Typically a certified home appraisal will cost from $350.00 to $500.00.
Do I have to pay any additional fees?
Many of the same costs that someone pays to obtain a home mortgage purchase loan, or to refinance their existing mortgage apply to reverse mortgages too. FOR EXAMPLE, expect to be charged the following fees:
- An origination fee (most times 2%)
- Up-front mortgage insurance premium (for FHA reverse mortgages)
- An appraisal fee (approx. $350.00 – $500.00)
- And certain other standard closing costs which may vary regionally
- A monthly service charge of approx. $30.00 is calculated onto the loan balance into the principal borrowed amount.
In most cases, these fees are capped and may actually be financed as part of the reverse mortgage.
Do I still have to pay my insurance and property taxes?
YES. Because you continue to retain title to your home you will continue to remain responsible for the property taxes, insurance, utilities, fuel, maintenance and other expenses.
Is my interest deductible on my income taxes?
Generally, no. Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.
Will my mortgage balance increase over time?
IMPORTANT: The amount you owe on a reverse mortgage generally grows over time. Interest is charged on the outstanding balance and added to the amount you owe each month. That means your total debt increases over time as loan funds are advanced to you and interest accrues on the loan.
Why do I need homeowner's insurance?
Most lenders will require proof that you have purchased a hazard as well as a flood insurance policy and payments are up to date.
Why do I need mortgage insurance?
This is a required policy. It will protect you and your heirs by insuring that the amount required for the repayment of the loan will never exceed the value of your home when payment is due. This payment can be financed as part of your reverse mortgage proceeds.
VERY IMPORTANT: The home must meet HUD minimum property standards. In some cases, home repairs can be made after the closing of a reverse mortgage.
Counseling - You are required to participate in a consumer education session with a HUD approved counselor. Since a reverse mortgage is not for everyone, the process will help ensure that you make the right decision. After the session has been completed you are given a certificate of borrower counseling which is valid for 180 days after the session. This certificate is to be presented to the lender as proof that you attended and completed the counseling session.
Application - Your home mortgage consultant will help you complete and sign a loan application. Once you have submitted your completed application, you will receive a disclosure listing the total estimated cost of the loan as required by the Federal Truth In Lending Act.
THIS PROCESS SHOULD HELP PROTECT THE HOMEOWNER FROM PREDATORY LENDERS.