What is a Reverse Mortgage?
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.
What is a Reverse Mortgage for Purchase?
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
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.
Does the lender take title to my home when I get a Reverse Mortgage?
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.
How long does it take to get a Reverse Mortgage?
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.
Do I need to get Reverse Mortgage Counseling?
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.
How much money can I get with a Reverse Mortgage?
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.
How do I receive the money from a Reverse Mortgage?
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.
How much are closing costs on a Reverse Mortgage?
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.
What is the out-of-pocket cost for a Reverse Mortgage?
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.
What happens if my home goes up in value? Does the lender keep the additional equity?
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.
What happens if the loan balance exceeds the home value when I pass away, and my heirs/estate don’t want to keep the home?
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.
What happens if the loan balance exceeds the home value when I pass away, and my heirs/estate want to keep the home?
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 Learning Resource Center 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 use our Live Chat feature or just give us a call!
These materials are not from HUD or FHA and were not approved by HUD or a government agency.