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How do I know
if I qualify? A reverse mortgage enables older homeowners (62+) to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you. Below are some common questions asked by consumers about reverse mortgages.
The amount of funds you
are eligible to receive depends on your age (or
the age of the youngest spouse in the case of couples), the
appraised home value, interest rates, and in the case of the
government program, the lending limit in your area. In general,
the older you are and the more valuable your home (and the less
you owe on your home), the more money you can get.
Does
My Home Qualify?
Eligible property types
include single-family homes, 2-4 unit properties, manufactured
homes (built after June 1976), condominiums, and townhouses. In
general, cooperative housing is ineligible. However, some lenders
have developed private programs that lend on co-ops in New York.
What
are My Payment Plan Options?
My Understanding
is that the Unused Balance in the Line of Credit Option
No,
you're not earning interest like you do with a savings account.
The growth factor, which is equal to roughly the interest that
you're being charged, takes into consideration that your
home has appreciated in value over the past 12 months and that
you are one year older. How Does the Interest Work on a Reverse Mortgage?
With
a reverse mortgage, you are charged interest only on the
proceeds that you receive. Most reverse mortgages charge a
variable interest rate (although fixed rate products are
entering the marketplace) that is tied to an index, such as the
1-Yr. Treasury Bill or the London Interbank Offered Rate
(LIBOR), plus a margin that typically adds an additional one
to three percentage points onto the rate you're charged. Interest
is not paid out of your available loan proceeds, but instead compounds
over the life of the loan until repayment occurs.
Are
There Any Special Requirements to Get a Reverse Mortgage?
As
long as you own a home, are at least 62, and have enough equity
in your home, you can get a reverse mortgage. There are no
special income or medical requirements.
What
If I Have An Existing Mortgage?
You
may qualify for a reverse mortgage even if you still
owe money on an existing mortgage. However, the reverse
mortgage must be in a first lien position, so any existing
indebtedness must be paid off. You can pay off the existing
mortgage with a reverse mortgage, money from your
savings, or assistance from a family member or friend.
For
example, let's say you owe $100,000 on an existing mortgage.
Based on your age, home value, and interest rates, you qualify
for $125,000 under the reverse mortgage program. Under this
scenario, you will be able to pay off ALL the existing mortgage
and still have $25,000 left over to use as you wish. If, however, you only qualify for $85,000, then you would need to come up with $15,000 from your own savings to get the reverse mortgage. Even then, all the money from the reverse mortgage will have been used to pay off the existing mortgage. On the other hand, you won't have a monthly mortgage payment anymore.
If
you find yourself in a deficit situation where you don't have
enough money to pay off the existing mortgage, you may use funds
from a grant or gift from a family member or friend to cover the
gap, but you cannot incur a new debt obligation (i.e.,
loan).
What Is
the Service Fee Set-Aside?
Under the FHA
HECM program, you are charged a monthly servicing fee
that ranges from $30-$35 to manage your account once the
loan closes. The SFSA is an estimate of what the total servicing
fees will be over the life of the loan, by multiplying your life
expectancy (converted from years into months) multiplied by
either $30 or $35.
Although
it's not considered a closing cost, the SFSA can equal several
thousand dollars, which is deducted from your available
loan proceeds. You do not have access to that money, nor do you
earn interest.
Will
I Lose My Government Assistance If I Get a Reverse
Mortgage?
A
reverse mortgage does not affect regular Social Security or
Medicare benefits. However, if you are on Medicaid, any reverse
mortgage proceeds that you receive must be used immediately.
Funds that you retain would count as an asset and could impact
Medicaid eligibility. For example, if you receive $4,000 in
a lump sum for home repairs and spend it all the
same calendar month, everything is fine. Any residual funds remaining
in your bank account the following month 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 would be ineligible for Medicaid. To
be safe, you should contact the local Area
Agency on Aging or
a Medicaid expert.
Why
Do I Need to Get Counseling?
Counseling
is one of the most important consumer protections built into the
program. It requires an independent third-party to make sure you
understand the program, and review alternative options, before
you apply for a reverse mortgage.
By
law, a counselor must review (i) options, other than a reverse
mortgage, that are available to the prospective borrower,
including housing, social services, health and financial
alternatives; (ii) other home equity conversion options that are
or may become available to the prospective borrower, such as
property tax deferral programs; (iii) the financial implications
of entering into a reverse mortgage; and, (iv) the tax
consequences affecting the prospective borrower’s eligibility
under state or federal programs and the impact on the estate or
his or her heirs.
When
Do I Pay Back My Loan?
No
monthly payments are due on a reverse mortgage while it is
outstanding. The loan is repaid when you cease to occupy your
home as a principal residence, whether you (the last remaining
spouse, in cases of couples) pass away, sell the home, or
permanently move out. The amount owed can never exceed the value
of your home. Furthermore, if the home is sold and the sales
proceeds exceed the amount owed on the reverse mortgage, the
excess money goes to you or your estate.
Under
What Circumstances Should I Not Consider a Reverse
Mortgage?
Because
of the upfront costs associated with a reverse mortgage, if you
intend to leave your home within 2-3 years, there may be other
less expensive options to consider, 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. Let's look at the many ways I Can Use the Proceeds from my
Reverse Mortgage Loan......
(please click on picture)
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