What is a reverse mortgage?
A reverse mortgage is a loan that allows senior homeowners to access the equity in their homes in the form of cash proceeds. Borrowers must continue to live in and own the home if they have a reverse mortgage. In 2019, over 30,000 seniors took advantage of the benefits of a reverse mortgage.1
How does a reverse mortgage work?
A Home Equity Conversion Mortgage (HECM) or reverse mortgage is a Federal Housing Administration (FHA) insured loan2 for homeowners who are 62 years and older. It allows them to access a portion of their home equity.
The amount of funds that can be received is determined by the age of the youngest borrower (or non-borrowing spouse)3, the lesser of the appraised value of your home, sale price, or the FHA national lending limit of $765,600, current interest rates and the remaining balance of your existing mortgage (if applicable) and any other mandatory obligations.4
The funds can be disbursed in a few ways. One option is through a lump sum which is only available with a fixed-rate loan. There are also options for an adjustable-rate HECM loan which allows the borrower various options on how to receive their disbursements. They can choose to receive equal monthly payments (Tenure), equal monthly payments for a fixed period of months (Term), draw at any time and in any amount of the borrower’s choosing from the preset amount (Line of Credit), a combination of a line of credit plus scheduled monthly payments (Modified Tenure), or a combination of line of credit plus monthly payments for a fixed period of months (Modified Term).
What costs are involved?
The costs associated with a HECM are typically higher than a traditional forward loan. These fees tend to be paid from the loan proceeds and not directly paid out-of-pocket by the borrower. HECM loans require a 2% upfront mortgage insurance payment, plus an additional 0.5% annual charge, on top of origination costs and lenders’ fees. Any amount you borrow, including these fees and insurance, accrues interest, which means your debt grows over time.5
Is it a short-term solution?
If you are planning to move or sell the home, a reverse mortgage may not be a practical solution. The up-front fees that come along with a reverse mortgage can be costlier than the short-term benefit in this scenario.
Homeowners who decide to leave or sell the home will need to repay the loan shortly thereafter. While borrowers may keep any sales proceeds above the balance owed on the loan, reverse mortgage costs will have already been paid and they will be out those funds.
After learning about the reverse mortgage basics, if you decide this might be right for you, call 800.976.6211 and speak to a licensed loan advisor about your options.
2 As required by the Federal Housing Administration (FHA), you will be charged an up-front mortgage insurance premium (MIP) at closing and, over the life of the loan, you will be charged an annual MIP based on the loan balance.
3A spouse must meet the following requirements to be considered eligible: 1) Be the spouse of the reverse mortgage borrower at the time of loan closing and remain the spouse of the borrower for the duration of the borrower’s lifetime. 2) Be properly disclosed to the lender at origination and specifically named as a Non-Borrowing Spouse in the loan documents. 3) Occupy, and continue to occupy, the property securing the reverse mortgage as the principal residence.
4Mandatory obligations are those fees and charges, as defined by HUD, incurred with the origination of the HECM loan that are paid at closing or during the first 12-month disbursement period. This includes but is not limited to: the loan origination fee; counseling fee; up-front MIP; third-party closing costs; customary fees and charges for warranties, inspections, surveys, engineer certifications; repair set-asides; set-aside for property taxes and insurance; and delinquent federal debt.