Expert Reverse Mortgage Information
What You Need to Know About Reverse Mortgages
Find key reverse mortgage facts in our free information kit. See how a reverse mortgage can help you live a better, more secure retirement lifestyle.
What do you do when you have substantial home equity and are over 62 years old? As of January 2023, seniors hold an estimated $11.8 trillion in home equity. These seniors tend to avoid traditional mortgages because monthly payments can feel like a burden. Plus, the commitment that comes with a conventional option is simply too risky for someone over 62.
Your best bet to take full advantage of home equity is to take out a reverse mortgage! These loans don’t become due and payable unless you move out or pass away.
In this guide, we’ll take a deep dive into reverse mortgages so you can decide whether they’re right for you.
What is a Reverse Mortgage?
A reverse mortgage is a specific loan type for senior investors. It allows elderly homeowners to acquire funding in a non-traditional way.
Seniors who have enough home equity can acquire a reverse mortgage loan. These loans are typically funded as a lump sum, line of credit, or monthly payments. Unlike similar loans, you don’t need to pay a reverse mortgage back during your lifetime.
This type of loan only becomes due and payable if the senior borrower passes away. It can also be due to whether they move out permanently or sell the home they were funding with the mortgage. Another unique factor about this loan is that the borrower only needs to return the home’s resale value, even if it’s lower than the original loan amount.
Reverse mortgages are FHA-insured up to a 2024 limit of $1,149,825. For people who live in states with very high real estate prices, a jumbo reverse mortgage can help you unlock equity up to $5,000,000. Jumbo reverse mortgages are not FHA-insured.
Since these mortgages are insured, the borrower is not responsible for paying the difference but you do have to continue to pay all required property taxes, homeowners insurance, and HOA fees due.
Who Can Benefit from a Reverse Mortgage?
Reverse mortgages are designed for those who have already paid off their homes and only need to pay off a little more of their mortgage. That leaves them with substantial equity.
In most cases, the borrower has already retired or is about to. The HECM program has a minimum reverse mortgage age requirement of 62 and above.
How Do Reverse Mortgages Work?
In a reverse mortgage, the homeowner doesn’t make payments to the lender. Instead, it’s the other way around.
As a homeowner, you can pick just how you receive the payments and only pay interest on the amount you’ve received. You don’t have to pay upfront since the loan balance collects the interest. You’ll also get to keep the title of the home.
Throughout the loan, your debt will increase, and home equity will drop.
Of course, your home will be the collateral for this loan. When you move permanently or die, the money from the home’s sale will be used to pay off the loan. Any leftover money from the sale will go to you or your estate.
According to the IRS, reverse mortgages are not taxable.
Qualifications and Requirements
Beyond being at least 62 years old, other reverse mortgage requirements are pretty simple and easy to qualify for. Let’s consider what it takes to be eligible for a reverse mortgage.
1. Property Type
If you own property built after June 15, 1976, you qualify for a reverse mortgage. This only applies to houses, townhouses, condos, and manufactured homes.
According to the FHA, cooperative housing owners can’t take out reverse mortgages because they don’t technically own the house they live in&emdash;they only have shares.
In New York, state law doesn’t allow co-op owners to take out reverse mortgages.
2. Equity and Fees
Reverse mortgages don’t have typical income or credit score requirements. But they still have rules about what disqualifies you from getting a reverse mortgage.
Besides being 62 years old, you must own your home or have at least 50% equity. You’ll need to pay:
- An up-front insurance premium
- An origination fee
- Standard closing costs
- Mortgage insurance premiums (MIPs)
- Interest
- Loan servicing fees
Lenders must follow the federal government’s rules on how much they can charge for each item.
3. Counseling
The HUD requires borrowers to complete an approved counseling session before receiving a reverse mortgage loan. The session costs around $125 and lasts 90 minutes. You’ll learn everything you need to know about the loan.
4. Collateral Protection
You must stay current on homeowner’s association fees, insurance, and property taxes. Regardless of the reason, you'll have to repay the loan if you don’t live in the house for over a year.
Benefits of Reverse Mortgages
Reverse mortgages can be a great opportunity for senior investors. Let’s look at some of their many benefits.
1. Additional Income for Retirees
Reverse mortgages are perfect for retirees who may not have many cash savings or investments. This loan will let them turn their illiquid assets into additional income if they have accumulated enough wealth in their properties.
2. Keeping the Property
You won’t need to sell your home to liquify your assets. With a reverse mortgage, you can keep living in the property while you get cash out of it. This way, you won’t get priced out of your neighborhood or worry about downsizing.
3. Paying Off Existing Home Loan
You don’t need to pay off your home before you borrow a reverse mortgage. You can use the loan’s proceeds to pay your existing home loan, freeing up money for other expenses.
4. Tax Liability
As we mentioned, the IRS considers proceeds from a reverse mortgage to be a loan advanced instead of an income. That means these proceeds don’t have any tax liability.
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Drawbacks and Considerations
While the pros outweigh the cons, it’s wise to look at the downsides of a reverse mortgage before borrowing.
1. Possibility of Foreclosure:
The borrower doesn’t need to make mortgage payments, but they do need to meet certain conditions set by the lender. If they don’t, the lender may choose to foreclose.
For example, you’ll need to live in and maintain the house you’ve loaned. Any signs of disrepair that affect the market value at the time of the sale can put you at risk of foreclosure.
2. Heirs need to repay the loan when the borrower passes away:
The most notable con of a reverse mortgage is that your heirs will have to repay the loan when you pass away. They will have 30 days to either pay off the reverse mortgage or sell the house. It may be possible to extend this deadline. In essence, you are consuming the equity in your home, so when your heirs sell your home at your passing, they will receive a smaller inheritance.
You also have to pay attention to fees, most of which are paid upfront and are added to the reverse mortgage balance. Another con is that any interest you pay on a reverse mortgage can’t be deducted on your taxes like a regular home loan, although you can deduct the total interest paid if you pay the loan off in full.
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Types of Reverse Mortgages
There are two major types of reverse mortgage loans&emdash;let’s look at your options.
- Home Equity Conversion Mortgages (HECMs): HECMs are the type you’re most likely to get. They’re also called FHA reverse mortgages since they only come from FHA-approved lenders.
- Proprietary Reverse Mortgages: This loan allows you to borrow up to $4 million in equity. They don’t have the same regulations as an HECM, making them more susceptible to scams.
- Single-Purpose Reverse Mortgages: These loans let homeowners aged 62+ borrow against their home equity for a specific, approved purpose (like property taxes or home repairs). They tend to have lower fees and better rates than other reverse mortgages.
Application Process
The process of applying for and receiving a reverse mortgage is pretty simple. Let’s walk you through it.
- Consult a loan officer: First, meet with a reverse mortgage loan officer to discuss your financial situation and see if this type of loan is right for you.
- Attend HUD-approved counseling: Federal law requires you to go through counseling with a HUD-approved agency. This is the safest way for you to fully understand the terms, costs, and risks of a reverse mortgage.
- File your application: Submit your reverse mortgage application to your chosen lender. If you're in Texas, you have a seven-day cooling-off period after counseling to decide. During this period, lenders cannot charge fees or order services.
- Home appraisal: An appraisal will determine your home's value and how much you can borrow.
- Review the loan agreement: Once approved, carefully review the loan agreement. Hiring an expert financial advisor to help you understand the fine print may be wise.
- Receive your funds: You can receive the loan funds in one go, as a line of credit, or via monthly payments.
Reverse Mortgages Vs Home Equity Loans/HELOCs
Reverse mortgages are often compared with home equity loans/HELOCs for one reason: they both allow homeowners to tap into their home equity. But at a closer look, the two are very different.
A reverse mortgage is for senior homeowners over 62 years old who want to turn their home equity into an income without making monthly payments. The loan simply grows over time and only becomes due when you sell the property, move, or pass away.
Meanwhile, home equity loans are simply lump sums of cash based on your home's value. They’re similar to traditional mortgages since you can pay them off with monthly payments.
If you receive them as a line of credit (HELOC), these loans function like a credit card. That means you can borrow against your home's equity up to a pre-approved limit as needed.
Managing a Reverse Mortgage
Once you've applied and picked a lender, you can still make efforts to keep your reverse mortgage rates in check. Here's what we recommend.
1. Fixed Rate Options
First, determine whether a fixed or adjustable-rate reverse mortgage better suits your financial needs. In most cases, fixed-rate loans are much better since they're stable and predictable throughout the loan's life. Adjustable-rate options may be more affordable initially, but they can add up over time. Luckily, there are limits to how much the rate can change – no more than 5% over the original rate for jumbo reverse mortgages.
2. Refinancing
Consider refinancing your reverse mortgage:
- If the current market conditions are too dynamic or you've found a better rate option. Refinancing lets you replace your current mortgage loan with a new one with more favorable terms, such as lower interest rates or reduced fees.
- If your spouse didn’t meet the reverse mortgage age requirements when you first obtained the loan, but they’re now old enough, you can add them to the loan as part of a refinance.
- To cash in equity that’s built up since you first took out your reverse mortgage. This could be especially true in today’s real estate market. Refinancing an old reverse mortgage could unlock tens or hundreds of thousands of dollars in new equity, and give you even more cash flow for your retirement.
One specific requirement of a reverse mortgage refinance is that you must have had the existing loan for at least 18 months. Besides this, the usual reverse mortgage requirements apply to your refinance.
3. Hire a Financial Advisor
Consult a professional financial advisor if your reverse mortgage rates affect your financial health. They'll show you the right course of action based on your current goals, budget, and loan terms.
Conclusion
Reverse mortgages are an excellent option for seniors with substantial equity in their homes. It allows them to avoid monthly payments and make the most of their property before they pass away, sell it, or move out. But navigating the world of reverse mortgages, that too post-retirement may be difficult for most. That’s why it is very important to hire and work with professionals who can make the process and your life easier. Our team at Equity Access Group has a proven record of getting you the most out of your home equity, you can contact us here to get started and enjoy the home equity you deserve!
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