Whether you're considering a reverse mortgage for yourself or a loved one, we hope that this article will provide you with the information you need to make an informed decision.
Frequently Asked Questions
One of the most common questions asked by those considering a reverse mortgage is whether their home qualifies for this type of loan. The good news is that many different types of properties are eligible for reverse mortgages.
If you own a single-family home, a property with two to four units, a condominium, or a townhouse, you may be able to qualify for a reverse mortgage. Additionally, manufactured homes that were built after June 1976 are also eligible.
However, it is important to note that co-operative units do not qualify for reverse mortgages. If you live in a co-op, you may need to explore other options for accessing the equity in your home.
It's worth noting that even if your property type is eligible for a reverse mortgage, there are still other factors that will be considered when determining your eligibility.
These factors include your age, the amount of equity you have in your home, and your ability to maintain the property and pay property taxes and insurance.
While there are some specific criteria that must be met, the good news is that the process is generally straightforward.
To qualify for a reverse mortgage, you must be at least 62 years old and own a home with enough equity to cover the loan.
There are no medical requirements to qualify for a reverse mortgage, which means that individuals with a variety of health conditions may be able to access the equity in their homes.
It's important to note, however, that lenders do conduct a financial assessment to determine whether a borrower has the financial capacity to continue paying mandatory obligations such as property taxes and homeowner's insurance.
This assessment is conducted to ensure that borrowers are able to meet these obligations and avoid defaulting on the loan.
If a lender determines that a borrower may not be able to keep up with these payments, they may set aside a certain amount of funds from the loan to cover future charges.
This helps to ensure that the borrower is able to maintain the property and keep up with these obligations.
The good news is that it is possible to obtain a reverse mortgage even if you still owe money on your home.
However, it's important to understand that the reverse mortgage must be in a first lien position, which means that any existing indebtedness must be paid off.
This can be done in a number of ways, including paying off the existing mortgage with funds from your savings or with assistance from a family member or friend.
Another option is to use the funds from the reverse mortgage itself to pay off the existing mortgage.
For example, if you owe $100,000 on your existing mortgage and qualify for $125,000 under the reverse mortgage program, you could use the reverse mortgage funds to pay off the existing mortgage and still have $25,000 left over to use as you wish.
It's worth noting that when you take out a reverse mortgage, you will still be responsible for paying property taxes, homeowners insurance, and any necessary maintenance costs.
However, the reverse mortgage funds can provide a valuable source of income for seniors who are looking to supplement their retirement income or cover unexpected expenses.
Social Security and Medicare
First and foremost, it's worth noting that a reverse mortgage does not affect regular Social Security or Medicare benefits. These benefits are not means-tested, which means they are not based on your income or assets.
However, if you receive Medicaid or Supplemental Security Income (SSI), any reverse mortgage proceeds that you receive must be used immediately. Any funds that you retain will count as an asset and could potentially impact your eligibility for these programs.
For example, if you receive a lump sum of $4,000 for home repairs and spend it all in the same calendar month, there should be no impact on your eligibility for Medicaid or SSI.
However, if there are any residual funds remaining in your bank account the following month, they would count as an asset.
If the total liquid resources (including other bank funds and savings bonds) exceed $2,000 for an individual or $3,000 for a couple, you could become ineligible for Medicaid.
To avoid any potential issues, it's important to consult with a local Area Agency on Aging or a Medicaid expert to ensure that you fully understand the impact of a reverse mortgage on your specific situation.
By doing so, you can make an informed decision about whether a reverse mortgage is the right choice for you.
When a Reverse Mortgage is a Bad Idea
One such circumstance is if you intend to leave your home within the next 2 to 3 years. This is because the upfront costs associated with a reverse mortgage can be significant, and you may not have enough time to recoup these costs before you move out.
In such cases, it may be worth exploring other options that are less expensive, such as home equity loans, no-interest loans or grants that may be offered by your county government or a local non-profit to repair your home, or a tax deferral program if you're having problems paying your property taxes.
Another circumstance where a reverse mortgage may not be the best option for you is if you plan to leave your home to your children.
In many cases, the home is sold to pay back a reverse mortgage, which means that your children may not inherit the property as they had hoped.
A reverse mortgage offers various payment plan options to meet your financial needs. You can choose from four different payment plans - lump sum, tenure, term, and line of credit.
The lump sum payment option provides you with a one-time payment of the entire loan amount at closing. This option may be useful if you need the money to pay off an existing mortgage, cover medical expenses, or fund a large purchase.
With the tenure payment option, you will receive equal monthly payments for as long as you live in your home as your primary residence. This option provides a reliable source of income that you can use to cover regular expenses.
The term payment option provides equal monthly payments for a set period of time. This option may be beneficial if you have a specific financial goal, such as paying off debts or funding home repairs.
The line of credit payment option allows you to draw funds as needed, similar to a home equity line of credit. The unused portion of the credit line grows over time and can be accessed in the future.
You can also choose to combine these payment options to fit your specific financial goals. With a reverse mortgage, you have the flexibility to choose the payment plan that works best for you.
Use of Proceeds
There are no restrictions on how you can use the proceeds, and the money is tax-free.
The proceeds can be used to supplement your retirement income and cover daily living expenses, or to pay for medical bills, home repairs or modifications to make your home more accessible, and to pay off existing debts.
Many seniors use the proceeds from a reverse mortgage to cover property taxes and prevent foreclosure. Some borrowers also use the funds to take a dream vacation or to gift money to their children or grandchildren. The choice is yours.
The interest on the loan accrues over time and is added to the loan balance. The interest rate can be fixed or variable and is typically based on an index, such as the U.S. Constant Maturity Rate, plus a margin.
It's important to note that interest is only charged on the proceeds you receive from the reverse mortgage, not on the entire value of your home.
Additionally, interest is not paid out of your available loan proceeds. Instead, it accumulates over the life of the loan until repayment occurs.
When the loan is eventually repaid, either through the sale of the home or other means, the amount owed includes the principal amount borrowed plus any accumulated interest and fees.
The borrower or their heirs may choose to repay the loan by selling the home, using other assets, or refinancing with a traditional mortgage.
If you have a Home Equity Conversion Mortgage (HECM) Line of Credit, the unused balance may have a growth feature. However, it doesn't mean that you're earning interest like in a savings account.
Instead, the principal limit of your HECM loan will increase each month after the first month, at a rate that is equal to one-twelfth of the mortgage interest rate in effect at that time, plus one-twelfth of the monthly mortgage insurance premium rate.
This growth feature should be seen as a further extension of credit, rather than an interest accrual. This growth feature can be advantageous because it allows the unused balance in your line of credit to grow over time, providing you with a potentially larger pool of funds to tap into in the future.
Keep in mind, however, that this growth feature is subject to certain limitations and may not always be available, depending on the specific terms of your loan.
Also, the growth of the unused balance will depend on the interest rate environment at the time, so there is some level of uncertainty associated with it.
If you're considering a reverse mortgage, it's important to understand the servicing fee and how it works. The service fee set aside is a specific dollar amount that is deducted from your Original Principal Limit, and it's meant to ensure that your monthly servicing fee will be paid in the future.
It's important to note that the service fee set aside is not part of your outstanding balance and does not accrue interest.
Therefore, any funds remaining in the service fee set aside at the time of loan repayment are not subject to refund.
The monthly servicing fee covers the costs associated with administering your reverse mortgage loan, including maintaining accurate records of your outstanding loan balance, tracking property taxes and insurance, and issuing payments and statements of account.
Partial prepayments can be made to your reverse mortgage account without penalty in most cases.
However, each reverse mortgage product has specific sequences for applying partial prepayments. For instance, if you have a HECM reverse mortgage, your payments will be applied in a specific order.
First, to the part of your loan balance representing mortgage insurance premiums, secondly to the part of your loan balance representing servicing fees, thirdly to the part of your loan balance representing interest charges, and finally to the part of your loan balance representing principal advances.
It is essential to confirm with your loan servicer the manner in which your partial prepayments will be applied to your specific account.
MFYH strongly advises discussing the partial prepayment options available to you under the terms of your loan agreement with your reverse mortgage servicer.
This will allow you to have a better understanding of how your payments will be applied and how they can impact your loan balance over time.
Falling behind on property taxes is considered a default under the terms of your loan agreement and can trigger a loan default.
One option for paying your property taxes is through a "Tax Set Aside." This option allows you to work with your reverse mortgage servicer to determine your annual property tax amount and how many years you want them to pay the taxes on your behalf.
The required amount is then set aside from your loan proceeds, so it is important to budget for this cost accordingly.
It's important to note that you may also participate in property tax deferral or exemption programs, but you should consult with your loan servicer before doing so.
If you participate in a property tax deferral program, the lien created by the program must be subordinate to your reverse mortgage loan.
Some areas may allow for tax exemption programs, and your loan servicer can help you navigate participation in such programs.
Reverse mortgage borrowers may wonder what happens to their loan if they file for bankruptcy. In general, filing for bankruptcy does not automatically trigger a default under the Home Equity Conversion Mortgage (HECM) program.
However, borrowers will not be able to access any additional funds from their reverse mortgage unless that request for funds is approved by the court or trustee monitoring the bankruptcy proceedings.
It is important for borrowers to notify their loan servicer once any bankruptcy action is taken. If the reverse mortgage is not a HECM loan, borrowers should check with their loan servicer to determine if bankruptcy is a default under the terms of their loan.
In any case, it is crucial for borrowers to stay current on their property taxes and homeowners insurance payments during bankruptcy proceedings.
Failure to keep these obligations current can result in a default under the loan agreement, which may be grounds for calling the loan due and payable.