A Simple FAQ About Reverse Mortgages

A reverse mortgage is much different from a traditional mortgage loan. With this loan, the homeowner decides to borrow against the value of their home. In a traditional mortgage, the homeowner takes out a loan based on the value of the home and then pays it back with monthly payments. In each payment in a traditional home loan, the amount of equity increases. The amount owed to the lender falls.

A reverse mortgage is significantly different. This type of loan allows the homeowner to take out money based on the value of the home. That’s the same as a traditional loan. In both cases, the home is the collateral for the home. That means if a person fails to make payment, the home could be seized and sold. With a reverse mortgage, the homeowner does not have to repay the debt, and the home remains theirs until they move out or pass away.

In a reverse mortgage, the loan is repaid when the borrower is no longer living in the home. In some cases, that means the heirs of the homeowners will need to repay the loan or allow for the sale of the home by the lender.

These loans can be very confusing. For that reason, many people have questions about these loans. It is always best to ask your lender any additional questions you have as well. Here are some key questions.

Does the homeowner repay the reverse mortgage?

The homeowner does not have to repay the loan during their lifetime as long as they remain living in the home. If they move out of the home for an extended period or they pass away, the lender is then able to take possession of the home unless the airs cover the balance of the home loan.  Some reverse mortgages allow the borrower to make payments on the funds over time.

Who can obtain a reverse mortgage?

The homeowner, or both homeowners, must agree to the terms of the reverse mortgage. Borrowers must be at least 62 years of age or older to qualify for a loan.

How much can a homeowner borrow through a reverse mortgage?

The amount a person can borrow is called the principal limit. Lenders set this based on multiple factors. That includes the homeowner’s age as well as the value of the home. The available interest rate for the loan is also a factor. The highest principals are generally those who are older and have higher valued homes but can obtain a low interest on the loan. The younger the homeowner is, the less they are typically able to borrow.

When there are two homeowners, whose age is used to determine if a person qualifies for a reverse mortgage?

In some situations, a married couple may decide to use a reverse mortgage. In this case, the eligibility applies based on the age of the youngest co-borrower. This applies to any eligible non-borrowing spouse as well.

How much does the heir have to pay to complete the reverse mortgage after a parent’s death?

With a reverse mortgage, the amount owed increases over the life of the loan. That’s because the interest builds up during that time. If the homeowner does not make payment on the loan during their lifetime – which they do not have to do in many cases – the balance goes up as interest builds. The home equity decreases at the same time.

When the homeowner dies, the heirs, if they choose to pay off the loan, will need to pay the total amount borrowed as well as the interest that’s built up over time. In addition to interest, there may also be additional fees that get added to the cost of a reverse mortgage. It is critical to know the terms and conditions of any reverse mortgage, then, before investing in it.

Can a homeowner get a reverse mortgage if you still have a traditional mortgage on the home?

Many people who consider a reverse mortgage still owe money on their homes. It is possible to obtain a reverse mortgage with a mortgage loan balance in place. Most of the time, the homeowner will be obtaining a new loan, usually, a bigger one than they had prior, to pay off the first loan. The new mortgage (the reverse mortgage) then goes into effect. However, if the homeowner owes a significant amount of money on their current mortgage, the amount they receive from the reverse mortgage is likely to be much lower. That may not provide much room for spending on other things. It does help to pay off the existing mortgage. That means the homeowner no longer needs to make their monthly payment. That may create more flexibility in a person’s budget.

There are some situations where a homeowner may be unable to obtain a reverse mortgage with a traditional loan. If they have an existing mortgage that’s very high, they may not have enough equity to pay off their current mortgage using the new reverse mortgage.

Can a homeowner sell your home with a reverse mortgage on it?

The answer here is yes. Some people do this to downsize or move to a new location. It is possible to sell the home when a reverse mortgage is in place. However, when selling, the owner has to consider the value of the home and the amount of debt owed. Remember that the debt includes the value of the loan plus all interest and fees. This may make it essential to sell the home at a high enough dollar point to recoup all of those fees. If home prices rise, that may allow some homeowners to have enough equity in their property to cover these additional costs.

If the owner owes more than the home is worth, meaning they do not have equity, they may have to pay the fees out of pocket. This is determined by the current appraised value of the home at the time of the sale.

What happens when you pass away?

Once the owner of the home dies, the home’s reverse mortgage loan becomes due. This happens after all owners pass away (those listed on the reverse mortgage – you cannot add new owners to the home). When this happens, the heirs of the home must pay the loan in full with all interest and fees associated with it. Or they must sell the home. They may decide:

• To inherit the home. This may be beneficial if the home is worth significantly more than the loan balance. They could keep it, or they may then sell it later if they desire.
• To sell the home. This allows the heirs to sell the home and keep any difference in the value, if applicable.

What happens in a reverse mortgage when the amount owed is more than the home is worth at the time of death?

Most reverse mortgage loans have a clause in them that stays the heirs do not have to pay more than 95 percent of the appraised value of the home. The remaining balance of the loan is covered by the property’s mortgage insurance.

What happens if the reverse mortgage loan balance is less than the home’s value?

In this case, the heirs receive the proceeds from the home’s sale if they do not wish to pay to purchase the home.

What should a homeowner do with their heirs in preparation for using a reverse mortgage?

If the homeowner plans to use a reverse mortgage, he or she is never required to provide any information to heirs. However, doing so may be beneficial. It may help heirs to prepare for this decision down the road. In some cases, heirs have no interest in the home. If that is the case, the reverse mortgage lender will likely take ownership of the home to sell it.

What is a credit line growth offer?

A growing credit line, as it is sometimes called, is a feature of some reverse mortgage loans. In this specific setup, the less credit a homeowner uses now, the more they have available to them in the long term as they get older. However, unlike a typical credit card, there is growth in the credit line. That is, the amount they can borrow increases over time as they get older. That may mean they can borrow more over time if they want to do so.

Lenders determine the credit line based on the interest rate available as well as the mortgage insurance premium. Most often, this type of loan feature is not applicable for a fixed-rate payment option on the reverse mortgage.

What upfront fees are required for a reverse mortgage?

This differs from one organization to the next. However, most loans have some upfront fees. These are much like that applies to a traditional mortgage as well. It may be necessary to pay the costs upfront, but more commonly, a homeowner may elect to pay them from the loan proceeds. That means the homeowner will have less money at the closing of the loan.

There are various types of reverse mortgage fees. This includes real estate closing costs, fees paid to the lender, and initial mortgage insurance premium.

What costs does the property owner have on an ongoing basis with a reverse mortgage?

The ongoing costs are related to key mortgage insurance premiums, interest, and servicing fees associated with the loan. These fees are stipulated and clearly outlined before obtaining the loan – the homeowner should know exactly what to expect. The costs may change each month (though some offer a fixed rate payment).

The ongoing costs of the loan are added to the balance of the loan. Keep in mind that these are not paid out of pocket in most cases. The costs do compound over time. That means the interest and fees are added to the loan balance. The interest applies to the loan balance at that time each month.

What are mortgage insurance premiums?

Mortgage insurance is a type of insurance policy for the lender to take out on the loan. It helps to cover the amount owed on the home that exceeds the 95% appraised value. If the balance of the loan is more than the home is worth, this insurance helps to cover the additional costs. That helps to protect the lender in case the home value falls over time.

How does the homeowner receive the money from a reverse mortgage?

Most often, the borrower can choose which method is right for them. One option is to receive a lump sum payment. That is a one-time payment to the homeowner, often with a fixed interest rate. It has a higher cost in interest and fees on the entire loan amount. The amount available to the borrower is highest here.

Another option is to receive the funds in a monthly payment. At this point, the interest rate is adjustable. There are several limits of withdrawal possible during the first year. They may be a term loan with a fixed monthly payment for a set term or number of years. Or, some people may select a tincture, which provides a fixed monthly payment on an ongoing basis as long as it does not exceed the maximum amount.

A third option is a line of credit. This typically is an adjustable interest rate. There are limitations on withdrawal for the first year. This type of loan has a lower cost with interest and fees and may offer credit line growth features over time. It may be possible to combine this type of loan payment with a monthly payout.

A reverse mortgage can be a confusing loan because it is less typically. However, it provides many homeowners with the financial support they need as they are getting older and may not be earning money. More so, a reverse mortgage may be beneficial to those who do not wish to leave behind their home or feel comfortable that the heirs will not want to own it.