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In the most simplistic terms, instead of writing a check to reduce your mortgage principal each month or quarter, you’ll see that the interest accrued has simply been added to the balance owed. But to fully understand a reverse mortgage and how it works, you need a little more detail.
Let’s start with the basics. The federally insured Home Equity Conversion Mortgage was instituted in 1989. FHA and Fannie Mae wanted to give senior homeowners a way to receive additional income by giving them access to the equity in their homes without the burden of making monthly mortgage payments.
It is important to remember that while no monthly principal and interest payment may be required, you are still responsible for paying your property taxes, insurance, any applicable association fees or ground rents, and maintaining the home. Failure to do so will result in foreclosure.
The FHA Reverse Mortgage is federally-insured.
Reverse mortgages allow seniors over the age of 62 to borrow against the equity in their home. Funds from a reverse mortgage are considered loan proceeds, and are not taxable. They can be used for any purpose that you wish. You can use the available funds to pay off an existing mortgage, freeing up that monthly payment for other uses. Use the available funds to supplement Social Security and pension incomes, for medical expenses, travel, home repairs and ever-increasing property taxes or insurance bills. Reverse mortgages can also be used as an emergency line of credit you can access in times of uncertainty or financial hardship.
The reverse mortgage has many similarities to a traditional home equity loan. Remember, when you are getting a reverse mortgage that you are not giving up title or ownership in your home. You cannot lose your home under normal circumstances, but please understand foreclosure may occur if you do not pay your taxes and insurance and otherwise comply with the loan terms. You’ll receive a statement on a regular basis, and instead of writing a check to reduce your principal each month or quarter, you’ll see that the interest accrued has simply been added to the balance owed. If you ever wish to move or sell the home you’ll be responsible for repaying the amount borrowed, plus any interest and fees charged on the loan out of the sale proceeds. You will receive any remaining equity in your home, just like when you sell a home with a traditional mortgage.
Swipe left on the chart for mobile devices.
Features | Traditional Mortgage | Reverse Mortgage |
---|---|---|
Purpose | Borrow to buy a home. | Borrow against home equity without selling the home. |
Repayment | Monthly repayments are required. | No monthly payments. Repaid when borrower sells, moves, or passes away. |
Eligibility | Based on credit score, income, and debt-to-income ratio. | Typically homeowners 62+ years, with substantial home equity. |
Interest | Interest accumulates on the unpaid principal balance. | Interest accrues on the borrowed amount, added to the loan balance over time. |
Loan Term | Defined term (e.g., 15 or 30 years). | Until borrower's move, sale, or death. |
Equity Impact | As the loan is paid down, homeowner equity increases. | As the loan balance increases, home equity typically decreases. |
Risk of Foreclosure | If payments aren't made, risk of foreclosure exists. | Risk if homeowner doesn't pay property taxes, insurance, or maintain the home. |
Tax Implications | Mortgage interest may be deductible. | Loan proceeds aren't considered income and are not taxable. |
This is one of the most frequent Reverse Mortgage Questions that we receive, and we wish we were asked it more often so we could help clear up some of the many misconceptions! It’s easy, a Reverse Mortgage, also known as a Home Equity Conversion Mortgage (HECM), is a special type of mortgage designed for older adults who would like a way to tap the equity in their home. Reverse Mortgage borrowers can convert a percentage of their home value into a monthly payment, lump sum (up to 60% of available funds in the first year), a line of credit, or a combination of the three options. Reverse Mortgages are also commonly used to pay off an existing “forward” mortgage, eliminating the monthly principal and interest payment. Borrowers must continue to pay property taxes, insurance and any required association fees or ground rents; and maintain the property. Failure to do so may result in foreclosure. We have had many borrowers bring cash to closing in combination with a Reverse Mortgage to pay off their existing “forward” mortgage.
A Reverse Mortgage for Purchase, also known as a HECM for Purchase, or Home Equity Conversion Mortgage for Purchase, is a mortgage that allows borrowers to buy a home by making a large down payment, and financing the balance of the purchase price with a Reverse Mortgage. After closing, no monthly mortgage payments are required. Borrowers must continue to pay property taxes, insurance and any required association fees or ground rents; and maintain the property. Failure to do so may result in foreclosure. The Reverse Mortgage for Purchase was designed borrowers who were paying cash for a new home, and refinancing with a Reverse Mortgage shortly after, causing them to incur some closing costs twice. By using a Reverse Mortgage for Purchase, the need to pay certain costs twice is eliminated! The Reverse Mortgage for Purchase was introduced in 2009 and has been growing rapidly in popularity ever since. Access Reverse Mortgage Corp. submitted one of the first applications for this program in the nation on behalf of one of our Co-Founders on the day it was introduced.
Here is an example of a Reverse Mortgage for Purchase:
Purchase Price- $199,000
Examples
Age: 62 | Loan Amount: $104,276.00 | Down Payment: $105,850.70 | Interest Rate/APR*: 5.06%/6.939%
Age: 70 | Loan Amount: $114,624.00 | Down Payment: $95,502.70 | Interest Rate/APR*: 5.06%/7.108%
Age: 80 | Loan Amount: $130,743.00 | Down Payment: $79,383.70 | Interest Rate/APR*: 5.06%/7.455%
For informational purposes only. This is not a pre-approval for a loan.
Rates shown are for the Home Equity Conversion Mortgage program for purchase of a primary residence. Annual Percentage Rate calculation assumes a loan amount and borrower age as stated above with estimated closing costs and lender fees and zero points charged. Down payment required is subject to underwriting, credit and income approval and is an estimate that is subject to change. Loan approval is not guaranteed and is subject to lender and agency terms and conditions in place at time of application. Rates are accurate as of 5/12/2015 but are subject to change.
NO! This is one of the most common Reverse Mortgage Questions that we hear, and it’s always based on a misconception! A Reverse Mortgage does not require any transfer of ownership. You (the borrower) will retain title to your home. Your home will remain part of your estate. Borrowers must continue to pay property taxes, insurance and any required association fees or ground rents; and maintain the property. Failure to do so may result in foreclosure.
It depends on which company you use. We have heard of loans taking several months to close when the company handling it is inexperienced. We have transferred and successfully closed many loans for borrowers who spent months waiting for their loan to close, only to find out that the lender they were using was unable to close it. Our record from application to closing is 8 days! Generally speaking, the average refinance loan should take 3-4 weeks, and the average purchase loan should take 4-5 weeks from application to closing.
Yes! Anyone on title, and anyone who will be on title to the home is required to complete a counseling session with an approved 3rd party counseling agency. We can provide a list of approved counseling agencies to choose from. The counseling session is usually about an hour long and can be completed face to face or over the phone.
The amount you are eligible to borrow depends on your age, current interest rates, and the appraised value of your home. There is also the possibility that you would need to set aside some proceeds to pay your future taxes and insurance, depending on your income and credit history. Generally speaking, the older you are, the more you can borrow. Use our Reverse Mortgage Calculator to see how much you may be eligible to borrow.
Funds from a Reverse Mortgage can be accessed in many different ways. Borrowers can choose to receive a lump sum (limited to 60% of available funds in the first year), line of credit, monthly payment (term or tenure), or a combination of the three. Any existing mortgages or liens are required to be paid by the reverse mortgage proceeds, and typically any past-due federal debt or taxes, as well as judgments against a borrower will need to be paid.
We hear many different Reverse Mortgage Questions, but one we often hear repeated is about closing costs, and the rumor that they are very high. While it is true that closing costs on a Reverse Mortgage tend to be more expensive then a traditional mortgage or home equity loan, there are many options available to help reduce those costs. Some Reverse Mortgages have an origination fee, but there are options available without one as well. Other costs include title search, title exam, title insurance, MIP (Mortgage Insurance Premium- upfront and ongoing), appraisal, flood certificate, credit report, closing/settlement fee, MERS registration, transfer taxes, doc stamps, etc. Most closing costs can be financed and added to your initial loan balance. Counseling and appraisal may require payment upfront. In certain situations, credits may be available to subsidize closing costs, reducing your overall costs. For a detailed estimate of closing costs, please contact us today.
Most closing costs are simply added to your loan balance, with the exception of the appraisal and counseling, which may require payment upfront. (In some cases you may also be required to pay for additional inspections or repairs, depending upon your home type and condition.) Manufactured Homes require additional inspections which may need to be paid upfront.
Under the FHA Home Equity Conversion Mortgage Program, you are required to pay back ONLY the outstanding balance of the loan. If there is equity remaining in your home following repayment the equity will go to you or, upon your passing, to your heirs or estate.
A Reverse Mortgage is a non-recourse loan for the borrowers and their heirs/estate. Liability upon sale of home is limited to net sale proceeds. In the event that more is owed on the home than it is worth, they can simply work with the bank to sell the home for current appraised value. FHA insurance will cover any remaining balance, leaving the heirs with no additional debt from the reverse mortgage.
Upon the death of the last borrower, heirs will have an opportunity to keep the home by repaying the balance of the loan. In the event that more is owed on the home than it is worth, they can repay 95% of current appraised value and keep the home. FHA insurance will cover any remaining balance, leaving the heirs with no additional debt from the reverse mortgage. In either scenario, it is extremely important for your heirs to make contact with the reverse mortgage servicer upon your passing in order to communicate their intentions.
If you have any other Reverse Mortgage Questions, please visit our Blog and look through the many articles, studies and videos that we have available. We are always happy to answer your Reverse Mortgage Questions directly, so feel free to give us a call!
These materials are not from HUD or FHA and were not approved by HUD or a government agency.
This reverse mortgage informational video dives deep into the world of finance, comparing traditional loans and reverse mortgages. Which one comes out on top for your needs? Let's unravel the mystery together in this enlightening showdown!
Put together the pieces of a retirement plan. Add the equity of your home to your planning and retirement income. Learn more about how a reverse mortgage can help you plan for retirement.
Buy a new home with a Reverse Mortgage. You can buy a home with a Home Equity Conversion Mortgage for Purchase. Get the financing you need for the home you really want! Watch our video and learn more about your financial options.
Join us as we journey through the evolution and benefits of a reverse mortgage-a unique financial tool for seniors. Whether you're familiar with the term or hearing about it for the first time, by the end of this video, you'll have an understanding of the transformative impact a reverse mortgage can have on one's golden years. Let's get started!"
Download, print and read our FREE EBOOK with more information about reverse mortgages, and see how others in your situation are using them to increase their cash flow in retirement. Our eBook is a great first step for exploring the opportunities available through reverse mortgages.
The Center for Retirement Research at Boston College has developed an excellent guide to accessing your home equity. This detailed guide includes useful information and graphics that compare the available options, including a comparison of reverse mortgages and more traditional home equity lines of credit. You can download a copy by visiting their website, or request a physical copy be mailed to you right away.
The well-known Journal of Financial Planning has published several studies and reports recently that discuss the use of reverse mortgages in a variety of situations. One such report is titled Retirement Trends, Current Monetary Policy, and the Reverse Mortgage Market. This report discusses some of the trends for retiree financing, including a rise in the use of reverse mortgages.
The Joint Center for Housing Studies of Harvard University released a report titled “Housing America’s Older Adults”. This report includes detailed information about housing options for America’s older adults including how reverse mortgages can be used as a financial vehicle for housing after retirement.
The Consumer Financial Protection Bureau (CFPB) has published an eBook to help consumers better understand reverse mortgages. You can read or download this eBook directly from the CFPB’s website with more information about reverse mortgages.
These materials are not from HUD or FHA and were not approved by HUD or a government agency.
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