62 of the Most Asked Questions About Reverse Mortgages Answered
1. What is a reverse mortgage in simple terms?
A reverse mortgage is a loan available to homeowners, 62 years or older, that allows them to convert part of the equity in their homes into cash. The loan is called a reverse mortgage because instead of making monthly payments to a lender, as with a traditional mortgage, the lender makes payments to the borrower.
In other words, when you have a regular mortgage, you pay the lender every month to buy your home over time. It’s a loan in which the lender pays you. These mortgages take part of the equity in your home and convert it into payments to you – a kind of advance payment on your home equity.
2. What are the downsides?
The downside to a reverse mortgage loan is that you are using your home’s equity while you are alive. After you pass, your heirs will receive less of an inheritance. Another possible downside would be regrets by taking a reverse mortgage too early in your retirement years.
3. Is a reverse mortgage ever a good idea?
The high costs of reverse mortgages are not worth it for most people. You’re better off selling your home and moving to a cheaper place, keeping whatever equity you have in your pocket rather than owing it to a lender.
4. Is reverse mortgage a ripoff?
A reverse mortgage does not guarantee financial security for the rest of your life. You don’t receive the full value of loan. The face amount will be slashed by higher-than-average closing costs, origination fees, upfront mortgage insurance, appraisal fees and servicing fees over the life of the mortgage.
5. What is better than a reverse mortgage?
Get a home equity loan A home equity loan lets you access some equity in the form of a lump sum. Unlike a reverse mortgage, you repay it in fixed monthly installments over a contracted period. Home equity loans can have a fixed or adjustable interest rate.
6. What does Suze Orman say about reverse mortgages?
Suze says that a reverse mortgage would be the better option. Her reasoning is as follows: The heirs will have a better chance of recouping the lost value of stocks over the years since the stock market recovers faster than the real estate market. SuzeOrman.com
7. Why do banks not recommend reverse mortgages?
High fees come with more regulations than a regular mortgage so that accounts for some of the additional fees. Lenders also charge more because they claim they take on unique risks, in that reverse mortgages aren’t based on your income or credit score.
8. Can you lose your house?
The answer is yes, you can lose your home with a reverse mortgage. However, there are only specific situations where this may occur: You no longer live in your home as your primary residence. You move or sell your home.
9. Who should not get a reverse mortgage?
Any borrower must be at least 62 years old. If you’re married and your spouse isn’t yet 62, getting a reverse mortgage is not ideal. While new laws protect your non-borrowing spouse from losing the home if you die first, they can’t receive any more proceeds after you’re gone.
10. Can I sell my house if I have a reverse mortgage?
Negative equity protection This was introduced by the Government in September 2012. When the reverse mortgage contract ends and your house is sold, the lender will receive the proceeds of the sale and you cannot be held liable for any debt above this (except in circumstances such as fraud or misrepresentation).
11. How much money do you really get from a reverse mortgage?
The amount of money you can borrow depends on how much home equity you have available. You typically cannot use more than 80% of your home’s equity based on its appraised value. As of 2018, the maximum amount anyone can be paid from a reverse mortgage is $679,650.
12. Do you pay any interest?
As with most other loans and credit lines, reverse mortgage interest rates are charged on the funds that you receive from your loan. The unique part is that interest payments on your loan are deferred to the end of the life of the loan: they are not paid up-front, out-of-pocket, or monthly.
13. What happens if you outlive reverse mortgage?
When the last remaining borrower passes away, the loan has to be repaid. Most heirs will repay the loan by selling the home. If your loan balance is more than the value of your home, your heirs won’t have to pay more than 95 percent of the appraised value.
14. Can you pay off a reverse mortgage?
Reverse mortgage loans typically must be repaid either when you move out of the home or when you die. However, the loan may need to be paid back sooner if the home is no longer your principal residence, you fail to pay your property taxes or homeowners insurance, or do not keep the home in good repair.
15. Can heirs refinance reverse mortgage?
This type of mortgage is a type of home equity loan that features no payments due while its borrower is alive and living in the home. Reverse mortgages aren’t assumable, nor can a deceased borrower’s heirs refinance them.
16. Who owns the property in a reverse mortgage?
No. When you take out a reverse mortgage loan, the title to your home remains with you. Most are Home Equity Conversion Mortgages (HECMs). The Federal Housing Administration (FHA), a part of the Department of Housing and Urban Development (HUD), insures HECMs.
17. How many years does a reverse mortgage last?
About seven years. It can be taken out by a homeowner aged 62 or older. So, the normal term of a reverse mortgage is the length of time a borrower remains living in his home after having taken out the mortgage. According to Forbes Magazine, the average term ends up being about seven years.
18. What are the hidden costs of a reverse mortgage?
The origination fee covers a lender’s operating expenses associated with originating the reverse mortgage. A lender can charge the greater of $2,500 or 2% of the first $200,000 of your home’s value plus 1% of the amount over $200,000. HECM origination fees are capped at $6,000.4. Application/Fees/Disclosures.
19. Do I need good credit?
One of the many advantages of reverse mortgages is that you do not need good credit to qualify. The Federal Housing Administration (FHA) insures almost all reverse mortgages, which allows lenders to loan money to those who meet the age and home equity requirements, regardless of whether they have excellent credit.
20. Should I refinance my reverse mortgage?
There are many reasons it may be beneficial to refinance your existing reverse mortgage. Perhaps a higher loan limit may be available to you or you had a private reverse mortgage and would like to switch to the Home Equity Conversion Mortgage (HECM) program, which is insured by the Federal Housing Administration (FHA).
21. Does a reverse mortgage pay a lump sum?
A reverse mortgage lump sum is a large tax-free cash payout at closing. No mortgage payments are required on the lump sum as long as at least one borrower (or non-borrowing spouse) is living in the home and paying the required property charges.
22. How much equity do you need?
In general, though, you should expect to have 50% equity or more in your home to get a reverse mortgage, especially through HECM. This is because you must use your HECM to pay off your existing home loan first. If you own less than 50%, the proceeds of your reverse mortgage won’t cover that gap.
23. Which is better home equity loan or reverse mortgage?
The general rule of thumb is that a reverse mortgage works better for someone who needs a long-term, steady source of income, while a home equity loan is better for someone who needs short-term cash that they can repay.
24. How does a reverse mortgage affect my pension?
In most cases drawing regular payments from your loan will not affect your pension as they are not counted as income. … So, in simple terms, if the regular draw down payments are spent as they are received and not accumulated, then these will not affect your pension eligibility.
25. Are there any safe reverse mortgages?
Reverse mortgages can be a rather safe and effective way to boost your retirement income, but they’re not without some drawbacks and downsides. Interest charges are added to the balance of the loan over time, and there are closing costs for the loan too, just as with regular mortgages.
26. Can you pay off a reverse mortgage early?
Yes, they can be paid off early, before you move out of or sell your home or die. Most reverse mortgages are backed by the federal government’s Home Equity Conversion Mortgage program, and there’s no early payoff penalty with them.
27. Are reverse mortgages a good idea for retirees?
For those who have paid off their home or only have a small mortgage, a reverse mortgage may be a way to help cover retirement expenses. It allows you to borrow against the equity you’ve built up in your home. By doing so, you can supplement your income and remain in your current home.
28. What is the best age to get a reverse mortgage?
62 years old. The costs of the loan are best spread out over at least a five-year time period. If Your Spouse is Younger than 62 — To qualify for a reverse mortgage, the primary borrower must be at least 62 years old. Your spouse can be younger, but it is probably best to wait until everyone is eligible.
29. What happens if you don’t pay back a reverse mortgage?
What happens if I don’t pay my property-related expenses or don’t maintain my home? Not meeting the conditions of your mortgage may put your loan in default. This means the mortgage company can demand the reverse mortgage balance be paid in full and may foreclose and sell the property.
30. Who Pays Off deceased’s reverse mortgage?
If one spouse has died but the surviving spouse is listed as a borrower on the loan, he or she can continue to live in the home, and the terms of the loan do not change. At the death of the last borrower, though, adult children and other non-spouse heirs must pay off the loan.
31. How do you pay back a reverse mortgage loan?
The most common method of repayment is by selling the home, where proceeds from the sale are then used to repay the loan in full. Either you or your heirs would typically take responsibility for the transaction and receive any remaining equity in the home after the reverse mortgage loan is repaid.
32. How long does it take to get approved?
About 30-45 days. An application process generally takes about 30-45 days from start to finish and has five major steps. However, the longest part of the reverse mortgage loan process is the decision-making process that leads up to the application.
33. Do you have to pay mortgage insurance on a reverse mortgage?
Do these loans require mortgage insurance? No. The HECM reverse mortgage program has mortgage insurance premiums, but there are non-FHA programs available in the market for certain scenarios and those programs do not have mortgage insurance.
34. Can you modify a reverse mortgage?
Both forward and reverse mortgages allow borrowers to refinance without a penalty, and in both cases borrowers can modify the loan by paying down the balance. … These options to modify a HECM mean that in some cases, modification and refinancing are competing ways to draw funds. This is the case with Jane.
35. What credit score is needed?
There is no minimum credit score requirement, primarily because the main thing lenders want to know is whether you can handle the ongoing expenses required to maintain the house. Lenders will, however, look to see if you’re delinquent on any federal debt.
36. Is it hard to qualify?
The basic requirements to qualify for a reverse mortgage loan include: the youngest borrower on title must be at least 62 years old, live in the home as their primary residence and have sufficient home equity. Borrowers must also meet financial eligibility criteria as established by HUD.
37.Why are reverse mortgages so expensive?
Reverse mortgage rates may be low compared to other mortgage rates, but because of the way the interest is compounded, they become expensive over time. Borrowers often have to pay origination and appraisal fees, the cost of a title search, and additional mortgage insurance premiums.
38. Is it hard to qualify for a reverse mortgage?
The basic requirements to qualify for a reverse mortgage loan include: the youngest borrower on title must be at least 62 years old, live in the home as their primary residence and have sufficient home equity. Borrowers must also meet financial eligibility criteria as established by HUD.
39. How do I get out of a reverse mortgage?
The best way of getting out of a reverse mortgage is by repaying the loan balance in full. If you have a large balance that you are unable to pay in cash, the most common solution is to sell the home and use the proceeds to pay off the reverse mortgage.
40. Who Pays Off deceased’s reverse mortgage?
If one spouse has died but the surviving spouse is listed as a borrower on the mortgage, he or she can continue to live in the home, and the terms of the loan do not change. At the death of the last borrower, though, adult children and other non-spouse heirs must pay off the loan.
41. What happens if you don’t pay back a reverse mortgage?
What happens if I don’t pay my property-related expenses or don’t maintain my home? Not meeting the conditions may put your loan in default. This means the mortgage company can demand the reverse mortgage balance be paid in full and may foreclose and sell the property.
42. Does a Reverse Mortgage hurt your credit?
This kind of mortgage cannot negatively affect your credit rating. They are not “monthly repayment” type loans and are not rated through credit agencies.
43. Are there income requirements for a reverse mortgage?
One of the attractive features of the HECM reverse mortgage has been that there are no income or credit requirements. All homeowners 62 and older who live in their homes without a mortgage have been eligible, and those with mortgages may also be eligible if the balance is not too large.
44. What happens with a reverse mortgage when you go into a nursing home?
If you move out of your home for any reason (whether to live in a nursing home, downsize to a smaller house, or to be closer to family) and your spouse or the person living with you is a co-borrower on the reverse mortgage loan, they can stay in the home and continue to receive loan disbursements so long as they are living there.
45. How does a reverse mortgage affect Medicaid?
Reverse mortgages do not affect one’s Medicare or Social Security benefits but can potentially impact Medicaid eligibility. Reverse mortgages can be re-financed; therefore, a down real estate market should not be a consideration factor.
46. How does an AAG Reverse Mortgage Work?
This allows homeowners 62 years of age or older to convert a portion of their home equity into cash with no monthly mortgage payments. Borrowers are responsible for paying property taxes, homeowner’s insurance, and for home maintenance.
47. Are closing costs on a reverse mortgage deductible?
No. Homeowners who take out reverse mortgages can’t deduct the interest from their taxable income because they don’t pay it currently – it is added to the loan balance, which isn’t paid until the house is sold. Mortgage insurance was $6,000, lender’s origination fee was $5,000, and other costs were $3,000.
48. How is reverse mortgage calculated?
What you believe to be the appraised value of your home. This is used to help determine the amount of proceeds you will receive. Since a reverse mortgage first pays off your existing mortgage (if you have one), the calculator will subtract the approximate amount you owe from your total amount of estimated proceeds.
49. How do lenders make money on reverse mortgages?
How do banks make money on reverse mortgages? Origination fees – Depending on market conditions and loan amount, the lender may charge an origination fee to do the loan. Secondary market – Many lenders sell their loans to secondary market investors, who pay a certain premium for the loans.
50. What happens if my spouse died and I’m not on the mortgage?
If there is no co-owner on your mortgage, the assets in your estate can be used to pay the outstanding amount of your mortgage. If there are not enough assets in your estate to cover the remaining balance, your surviving spouse may take over mortgage payments.
51. Is a home equity loan better than a reverse mortgage?
Both have advantages and disadvantages. A reverse mortgage is costlier but doesn’t have to be repaid until you sell the home. A home equity loan keeps more money in your pocket but requires regular monthly payments that retirees on a fixed income might find burdensome.
52. What are the benefits of a reverse mortgage?
A reverse mortgage is a unique financial tool unlike any other in that it offers borrowers the ability to access their home equity without the burden of monthly mortgage payments. ¹ Using a reverse mortgage, you can access cash to supplement your income in retirement and age in place in your home.
53. Do you pay income tax on the loan?
No, payments aren’t taxable. Reverse mortgage payments are considered loan proceeds and not income. The lender pays you, the borrower, loan proceeds (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home.
54. How does a divorce affect a reverse mortgage?
In the case where a couple who has a reverse mortgage together decides to get a divorce, they must submit the divorce decree to the loan servicer. At that point, one of the spouses will be permitted to be removed from the home title, keeping the loan in the remaining spouse’s name.
55. How will this affect my pension?
In most cases drawing regular payments from your mortgage will not affect your pension as they are not counted as income. So, in simple terms, if the regular draw down payments are spent as they are received and not accumulated, then these will not affect your pension eligibility.
56. What is the difference between a HECM mortgage and a reverse mortgage?
With a HECM loan, borrowers still own their home. Reverse mortgage loans can be beneficial for senior homeowners who need extra funds to supplement their retirement income. To qualify, the borrower must be at least 62 years old and have significant equity in their home.
57. What is the maximum amount?
$765,600 loan limits for the government-insured Home Equity Conversion Mortgage (HECM), the maximum reverse mortgage limit you can borrow against is $726,525 (Updated January 1st, 2020), even if your home is appraised at a higher value than that.
58. Can you lose your house?
The answer is yes, you can lose your home with a reverse mortgage. However, there are only specific situations where this may occur: You no longer live in your home as your primary residence. You move or sell your home.
59. Can I sell my house if I have a reverse mortgage?
Negative equity protection This was introduced by the Government in September 2012. When the reverse mortgage contract ends and your house is sold, the lender will receive the proceeds of the sale and you cannot be held liable for any debt above this (except in circumstances such as fraud or misrepresentation).
60. What are the tax consequences?
Deductions and Tax Benefits The interest and fees are still tax deductible, but with a reverse mortgage, you won’t have to make mortgage payments until the loan comes due. This means that in most cases, you won’t have any interest or fees to deduct until the very end.
61. Who owns the property?
When you take out a reverse mortgage loan, the title to your home remains with you. Most are Home Equity Conversion Mortgages (HECMs). The Federal Housing Administration (FHA), a part of the Department of Housing and Urban Development (HUD), insures HECMs.
62. What happens when you walk away from a reverse mortgage?
If a borrower has a HECM reverse mortgage, then the lender cannot pursue the borrower for any deficiency balance. No matter how large the deficiency balance, it is the lender that is on the hook for any drop in the property’s value, if the borrower walks away from the reverse mortgage.