Reverse Mortgages - A Quick FAQ - Landmark Mortgage Capital

What are Reverse Mortgages?

Also referred to as a home equity conversion mortgage or HECM for seniors is a loan that allows seniors to convert the equity they have in their homes into cash. Most of these loans are handled by the Federal Housing Administration (FHA) and have specific requirements for qualification, approval, and management of the loan.

When you qualify and are approved for a reverse mortgage, you will receive funds in one of three ways from the lender. Your home serves as the security for the loan and will continue to do so as long as your home is your primary residence.

The benefit of a reverse mortgage is impressive for many seniors as it allows them a means to supplement their incomes while remaining in their homes. It is an effective way for seniors to leverage the investments they’ve made in their homes.

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How do Reverse Mortgages Differ from Conventional Mortgages?

With a traditional mortgage, you borrow money to pay for the home and then make payments to the lender each month. Over time, you build equity in your home while your loan balance decreases.

With a reverse mortgage, your home continues to serve as the security for the loan. However, as long as you continue to live in your home and meet your responsibilities and obligations, you do not need to repay the loan. The big difference, though, is that interest and fees are added each month increasing the loan balance rather than decreasing it. That means the loan balance goes up over time and your equity in the home goes down.

Common Questions for Reverse Mortgages

What are Your Responsibilities with a Reverse Mortgage?

You must continue to live in your home, as your primary residence as long as you maintain your reverse mortgage. If you split your time between a home in another location and your home, you will need to discuss your situation with your lender to see which home qualifies as your primary residence. Your home may go into foreclosure if you are absent for a majority of the year for non-medical reasons or you do not live in your home for more than 12 consecutive months for medical reasons. Other responsibilities you have for a reverse mortgage include the following.

Property tax payments.
Home insurance payments.

You have a few options for paying these with a reverse mortgage. First, you can pay them directly yourself out of your income. Second, you can use funds from your loan to help with these payments. Third, you can create a specific account with a portion of the loan proceeds to pay these expenses.

You are also responsible for keeping your home in good repair. This includes maintaining your lawn, handling major repairs as they arise, and planning for problems in the future so that you can manage them when needed. Your reverse mortgage lender may make certain repairs a condition for approval for the loan.

Can You Qualify for a Reverse Mortgage if You Have an Existing Mortgage?

Yes, it is possible to qualify for a reverse mortgage if you still owe on your mortgage. However, it may not be in your best interests to do so unless you owe a minimal amount on your mortgage. The point of a reverse mortgage is to put the equity you have in your home to work for you, now. You may be better served by other loan options, or even downsizing your home if you still have an existing mortgage.

Can You Decide to Sell Your Home if You Have a Reverse Mortgage?

People need to sell their homes for various reasons – even after obtaining a reverse mortgage. If you need to relocate to be closer to family, need a smaller home that is easier to maintain, or even if you need to move into an assisted living community for health reasons, it is possible to sell your home with a reverse mortgage. The remaining balance you owe will be taken out of the proceeds first, leaving you with what is left.

How Much Can You Borrow with a Reverse Mortgage?

There are quite a few factors that determine your eligibility for a reverse mortgage and how much you can borrow. Some of the major factors that affect this amount include the following:

Your age. You must be 62 to qualify at all, but the older you are at the time you borrow the money, the more money you qualify to borrow. If you have a co-borrower, the age of the younger of the borrowers is used to determine eligibility and loan amounts.
Your home’s value. The higher the appraised value of your home in the current market, the more money you can borrow against your equity in the home.
Interest rates. The current interest rate helps to determine how much money you receive initially. Lower interest rates mean more funds for you.

Other factors affect the amount you receive from your reverse mortgages, such as your financial obligations on the home (this includes things like property taxes, existing mortgages, liens, etc.) and the type of distribution you choose for your funds.

Is it Possible to Keep Ongoing Costs Low with a Reverse Mortgage?

There are things you can do that will minimize the ongoing costs of your reverse mortgage so that you can maximize your benefits. One of the options is to consider a line of credit rather than a lump-sum payment or monthly payout. With this line of credit, you only borrow funds against the equity in your home on an as-needed basis. That means you have a bit of a safety net to fund your retirement while limiting your repayment obligations (or those of your heirs) to the actual amount you used from what is available.

Even better, you only pay interest and fees on the money you use. This means that money that is available costs you nothing unless you elect to withdraw it from your line of credit. Incidentally, you may choose to use a line of credit in combination with the monthly payout option. You will not pay interest or fees on any money until you receive it. With the lump sum option, you receive all your funds in a single lump-sum payment and will owe interest and fees for the total amount.

Are There Fees of Upfront Costs with a Reverse Mortgage?

As with any mortgage, there are costs and fees associated with obtaining a reverse mortgage. The difference with a reverse mortgage is that you can choose to pay these fees out of pocket or you may elect to pay them with the proceeds of the loan. However, if you choose this option, it reduces the amount of money you get from the loan in a lump sum payment or monthly payouts if you choose that option. For some borrowers, it makes no difference one way or another. It is something to consider, though, if you are counting on the reverse mortgage to provide monthly income over the next several years.

What are the Options for Receiving Money from Your Reverse Mortgage?

Reverse mortgages are paid out to borrowers in one of the following three ways.

Line of credit (adjustable interest rate)
Monthly payout (adjustable interest rate)
Lump-sum payment (fixed interest rate)

You should note that fees and interest are charged against the initial loan amount. As a result, your equity in your home decreases over time as the loan balance increases.

What are the Qualifications for a Reverse Mortgage?

Reverse mortgages are specifically designed to help seniors. As a result, borrowers and co-borrowers must be no younger than 62 years old at the time of the loan. It is important to note that co-borrowers cannot be added at a later date. If your spouse is younger, it is best to wait for your spouse to reach the minimum age before applying for a reverse mortgage or not listing your spouse as a co-borrower. You need to be aware that this could mean your spouse will be required to pay off the balance of the loan or leave the home in the event of your death or if you are placed in a long-term care community.

Other factors for qualification include the following. Your home must be your primary residence for as long as you have your reverse mortgage. You must also have a sufficient amount of equity in your home to qualify for a home equity loan – and to make such a loan worthwhile. Borrowers seeking a reverse mortgage must also not be delinquent on any other federal debt, including federal student loans, taxes, etc. unless you use the funds from your reverse mortgage to pay off these debts. Your home must also be in a state of good maintenance and condition to qualify for a reverse mortgage.

Are there Alternatives to a Reverse Mortgage Worth Considering?

There are alternatives available to reverse mortgages that may ultimately prove more attractive to you as a borrower. These are a few options you might consider:

Sell your home to downsize. This will help you reduce your living expenses and is especially beneficial if you have a home that is too large or difficult to maintain.
Sell your home to your children. This allows the home to stay in the family and gives you a little wiggle room with your budget. You might even consider renting the home from your children while using the cash from the sale to pay rent and other expenses.
Refinance your home. This offers the opportunity to reduce your existing payment while freeing up cash related to the equity in your home. You win on both fronts.
Consider a home equity loan. These loans allow you to leverage the equity in your home into a single lump-sum payment. It puts you back at square one when it comes to your mortgage, but allows you additional funds for your retirement.
Open a home equity line of credit (HELOC), instead. The HELOC operates a lot like the line of credit option available with a reverse mortgage. You’re only required to pay interest on the funds you withdraw but have funds available should the need arise.

If you decide that a reverse mortgage is the best option for you, consider waiting as long as possible, after turning 62, to maximize the funds available to you through the reverse mortgage process.

A reverse mortgage is not the right choice for everyone. This FAQ should help you understand the loan better, what your options are, and if it is the best fit for your needs at the moment.

Wrapping It Up

If you decide that a reverse mortgage is the best option for you, consider waiting as long as possible, after turning 62, to maximize the funds available to you through the reverse mortgage process.

A reverse mortgage is not the right choice for everyone. This FAQ should help you understand the loan better, what your options are, and if it is the best fit for your needs at the moment.

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