Reverse Mortgage Loans

A reverse mortgage is a special type of loan which enables homeowners 62 years of age and above to convert part of the equity in their home into tax-free cash without having to sell the home, give up title or take on a new monthly mortgage payment. A reverse mortgage will not affect Social Security or Medicare and there are no income or credit qualifications. A reverse mortgage is a loan that does not require any monthly payments as long as the home is the borrower's principal residence. The proceeds are tax-free.

Currently, the reverse mortgage that is available is the Home Equity Conversion Mortgage (HECM) which was created by the federal government and managed by the Department of Housing and Urban Development (HUD). These loans are insured by the Federal Housing Administration (FHA) and require that the borrower:

  • Be a homeowner (single family 1-4 units, FHA approved condos, PUDs, manufactured homes, some mixed-use commercial properties)
  • Be 62 years of age or older
  • Must live in the home as their primary residence
  • Receive HUD-approved reverse mortgage counseling

Along with no payments, another advantage of a reverse mortgage is that there are no restrictions on how the loan proceeds must be spent. Borrowers may use the proceeds of their reverse mortgage to pay bills, purchase a car or another home, travel or use the money however they see fit. The terms of the loan specify the length of the loan. Although most borrowers opt for the reverse mortgage with no set term (reverses mortgages actually end at age 150!), borrowers can choose a set term of years, i.e., 10 years, 15 years or 20 years, etc., which increases the proceeds. It all depends on the needs of the borrower. Choosing a set term will increase the monthly proceeds of the reverse mortgage. Some borrowers choose a term because they need more money each month, others choose a term to postpone their Social Security until they reach their full retirement age or even retire at age 70. If a specified term is chosen for your reverse mortgage and the term ends, no repayment is required and you continue to live in your home.

The reverse mortgage proceeds can be taken in several ways:

  • Cash Out
  • Equal monthly payments
  • A line of credit
  • A combination of all three

You can also choose to receive a lump sum and there are programs available with fixed and adjustable rates. While a reverse mortgage and a home equity loan both require that the borrower have equity in their home, a reverse mortgage is different from a home equity loan. The reverse mortgage is based on age, current interest rates, equity and the value of the home, whereas a home equity loan is based on the borrower's qualifications for a loan, such as income and good credit standing. A financial assessment, however, is expected to be put in place by HUD in 2014 and evidence of ability for paying taxes and homeowners insurance will be required to substantiate that a borrower can handle these costs.

The greatest advantage of having a reverse mortgage is having no monthly mortgage payments, but with a home equity loan there are. Also, with a reverse mortgage there is an option whereby borrowers can set up a line of credit that grows over time and can be utilized in the future. As the money or a portion thereof remains unused, this means more money is available for the borrower to access. The longer the borrower leaves the line of credit (LOC) untapped, the greater the amount in that line. The typical home equity loan (or HELOC) does not have this feature which means reverse mortgages have an advantage. Proceeds from a HECM in a borrower’s line of credit are also FHA insured to guarantee the availability to the borrower, unlike a HELOC where the bank can terminate the line of credit at any point.

So does this all sound "too good to be true?"

That phrase, while it may apply to some situations, does not apply here. This loan is GOOD and for all the right reasons. For the right person a reverse mortgage can be a life changing experience. It can provide peace of mind and freedom from worry, and it can change your financial picture. Yes, there are closing costs, but they are typical of any FHA loan. One exciting feature: if there is enough equity in your home, your current mortgage balance can be completely paid off by the reverse mortgage thereby releasing you from those payments. It all depends on how much equity is left in your home as well as the reverse mortgage program you choose. It should be noted that the older you are, the more money you can receive.

A reverse mortgage isn’t for everyone because it does draw from the equity in your home. We suggest to those who are on the younger side, 62 years of age or slightly older, to obtain a life insurance policy for their heirs in the event there is no equity left at the end of the reverse mortgage. However, if you want to keep making monthly mortgage payments to maintain the equity for your children you may also do so.

There are different reverse mortgage programs available so be sure to speak with a reverse mortgage specialist who will be able to answer all of your questions. (Note: there is even a purchase program called HECM for purchase so a senior can even buy a new home with a reverse mortgage!) Weigh all your options and possible risks, determine a financial plan for the future and look at all your alternatives. Discuss reverse mortgages with your family and trusted advisors. An educated decision is always best.