Q: What is a reverse mortgage?
Q: Who is eligible for a reverse mortgage?
Q: What types of homes are eligible?
Q: If I still owe money on a first or second mortgage, can I qualify for a reverse mortgage?
Q: Are there different types of reverse mortgages?
Q: How much can I borrow?
Q: How can I get the cash from a reverse mortgage?
Q: What are the costs involved in a reverse mortgage?
Q: How does the interest work?
Q: Should I get a Fixed Rate or an Adjustable Rate Reverse Mortgage?
Q: Are there any restrictions on what I can do with the money?
Q: Am I able to use a reverse mortgage to purchase a home?
Q: Will the bank own my home?
Q: When do I have to pay back the loan?
Q: What is the most I can owe?
Q: Will this affect any of my other benefits?
Q: Is the interest accrued on the reverse mortgage tax-deductible?
Q: How will this affect the estate I leave to my heirs?
Q: How can I estimate what my costs may be?
Q: How can I compare products and features?
Q: What is a reverse mortgage?
A reverse mortgage enables older homeowners (62+) to borrow against the equity in their homes, without requiring them to give up title, sell the home, or take on a monthly mortgage payment. In a reverse mortgage, the payment stream is ‘reversed’ – instead of monthly payments to a lender, a lender makes payments to the homeowner, either through a line of credit, lump sum, or monthly installments. Virtually all reverse mortgages are regulated and insured by the Federal Housing Authority (FHA); insured reverse mortgages are also known as Home Equity Conversion Mortgages (HECM).
Q: Who is eligible for a reverse mortgage?
Qualifying for a reverse mortgage is surprisingly easy. The borrower(s) must be at least 62 years of age, own their own home, and occupy the home as their primary residence. There are no income, credit score, or health qualifications to meet.
Qualifying for a reverse mortgage is less complex than a typical home equity loan. Approval for a reverse mortgage is based on a sliding scale tied to the homeowners’ age and the appraised value of the home, not on credit history, employment or income. It is mandatory that borrowers seek counseling, ideally with other family members present, to discuss the best fit for their needs.
Q: What types of homes are eligible?
To be eligible for the FHA HECM, your home must be a single family home or a 1-4 unit home with one unit occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.
Q: If I still owe money on a first or second mortgage, can I qualify for a reverse mortgage?
Your home does not have to be owned “free and clear” (that is, the entire mortgage paid off) to qualify for a reverse mortgage; however, any existing mortgage or liens on the home must be paid off at the closing of the reverse mortgage. In fact, reverse mortgages are often used to pay off homeowners’ existing mortgages.
Q: Are there different types of reverse mortgages?
There are basically two types of reverse mortgages — the Standard Home Equity Conversion Mortgage (HECM) and the newer HECM “Saver”. The Standard HECM allows you to access more money from your home equity than the HECM Saver, but the Standard does require a higher FHA insurance premium calculated at 2% of the lesser of your home value or the $625,500 lending limit set by FHA. The FHA Insurance can be as high as $12,510 as a result. Conversely, the HECM Saver has significantly less FHA Insurance, calculated as only 0.01% which caps it out at $62.50. The HECM Saver provides less money to the borrower as a result. The interest on both of these loans can be fixed or variable.
The amount you can borrow depends on a few factors, including Age, Type of Reverse Mortgage, Current Interest Rates, Value of your home, and the FHA lending limits for your area. David Chee can provide you with a customized quote based on these factors. Visit the Quote Request form.
Q: How can I get the cash from a reverse mortgage?
The fixed rate reverse mortgage requires that you take all the proceeds at closing.
With the adjustable rate reverse mortgage, you can receive your money as a lump sum (all at once), monthly payments or a line of credit which can be accessed as often as needed for you future needs. Many people choose a combination of these options.
Q: What are the costs involved in a reverse mortgage?
Typically, there are three categories of closing costs: FHA Insurance, Origination fees, and Other closing costs, including title insurance, escrow fees, appraisal, notary fees. These costs are typically funded by the loan, not as “out of pocket” expenses.
Q: How does the interest work?
For adjustable rate reverse mortgages, interest rates are determined by a financial index that fluctuates with the market. Typically, the One Month LIBOR index is used and a margin is added to the index to determine your interest rate for the month. It is important to get the lowest available margin so you will have the lowest interest.
The lender typically sets the fixed rate reverse mortgage depending on market conditions. Your fixed rate is locked at closing and is set for the life of your loan.
Being that you are not required to make monthly mortgage payments with a reverse mortgage, the interest is added to your loan balance.
Q: Should I get a Fixed Rate or an Adjustable Rate Reverse Mortgage?
There is no “black or white” answer as to whether the Fixed Rate or the Adjustable Rate reverse mortgage is best for you without knowing the future of your home value, interest rates, your cash needs, and of course, how long you will live. General guidance is to consider the fixed rate reverse mortgage if you have a need for a large sum of cash. The Adjustable Rate reverse mortgage is generally considered when there is no immediate need for a large sum of cash. Circumstances can vary from borrower to borrower and consulting with a trusted financial advisor and/or family members is advised.
Q: Are there any restrictions on what I can do with the money?
There are no restrictions on how you may use the money you receive from a reverse mortgage.
Q: Am I able to use a reverse mortgage to purchase a home?
Yes. In January 2009, HUD introduced the ‘FHA HECM for Purchase’ program, allowing seniors to purchase a new principal residence and obtain an FHA HECM mortgage within a single transaction, eliminating the need for a second closing. An HECM for Purchase could be the answer for those looking to purchase a home in a new location or one that better suits their needs.
The bank issuing the reverse mortgage loan does NOT own your home. You remain the owner of your home.
Q: When do I have to pay back the loan?
Unlike a traditional mortgage, there are no monthly mortgage payments to make. The reverse mortgage becomes due when you or the last borrower 1) dies, 2) sells the house or moves to a new residence, or 3) does not live in the home for 12 consecutive months. In the case where there are multiple co-borrowers, and one person dies, changes residence, or leaves the home, the other borrower(s) can continue to live in and own the home.
Q: What is the most I can owe?
When the mortgage becomes due, the borrower(s) will need to pay the amount borrowed plus interest charges, FHA Insurance and service fees. Payment can be made by selling the home, refinancing, or using other assets if available.
If you sell the home, any proceeds beyond what is due on the loan would belong to you. If the house is sold for less than what is due, the FHA makes up the difference to the lender. This is for HECM loans only, and only applies if the borrowers opt to sell the home.
Q: Will this affect any of my other benefits?
The money received from a reverse mortgage is considered tax-free income. Regular reverse mortgage payments would not affect regular Social Security or Medicare benefits. However, extra cash from a reverse mortgage may affect eligibility for some needs-based programs such as Medicaid or Social Security Income (SSI). For specific questions on your benefits, we suggest you contact your local Area Agency on Aging, (800) 677-1116), or visit the web-based service Benefits Checkup, www.benefitscheckup.org. The homeowner must continue to pay property taxes and insurance.
Q: Is the interest accrued on the reverse mortgage tax-deductible?
Though a tax advisor can provide more information, interest accrues over time and is deductible only at the time that the loan is repaid.
Q: How will this affect the estate I leave to my heirs?
A reverse mortgage works by making the equity in the home available to the homeowner before it is sold. If the borrower dies, the reverse mortgage becomes due and payable. The borrowers’ estate would contact the lender and determine the schedule for repayment of the money received, plus interest and fees. The loan may be repaid by selling the home. If the home is sold for less than the amount owed, the FHA would make up the remainder to the lender.
Q: How can I estimate what my costs may be?
Under the FHA HECM program, the Federal Reserve Board requires that the lender disclose to the prospective borrower a Total Annual Loan Cost, or “TALC” disclosure. It displays the total transaction costs over the projected life of the loan. The borrower and the borrower’s family should be made fully aware of the costs incurred in obtaining a reverse mortgage.
David Chee can provide you with a detailed, customized quote and explain the costs that are involved. Read about David here. Or, get started with a free, customized quote here.
Q: How can I compare products and features?
There are many resources available to homeowners considering a reverse mortgage. Visit the Links page for links to HUD, AARP and other reverse mortgage resources.
While the Internet can provide potential borrowers with lots of information and even automatically calculated quotes, it takes the experience and care of a real, trusted reverse mortgage advisor to address the borrowers’ unique needs and financial situation.
Based in the San Francisco Bay Area, David Chee is a Certified Public Accountant and a licensed, experienced reverse mortgage specialist who can provide you with sound advice and an easy to understand quote to get started in your calculations. Contact David today.
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