A reverse mortgage may be a good option to consider since many senior homeowners have equity in their homes.
What is a reverse mortgage?
A reverse mortgage is a loan for homeowners aged 62 and older. Home Equity Conversion Mortgages (HECMs), are the most common type of reverse mortgage loans. A reverse mortgage allows homeowners to convert their home equity into cash with no monthly mortgage payments.1
How can my parents use their reverse mortgage?
An important reverse mortgage benefit is the proceeds that are received can be used however they decide. There are many ways the funds can be spent and below are few ways homeowners can choose to use them:
- Consolidate debt2
- Pay for everyday living expenses
- Make home improvements
- Afford medical/prescription costs
- Cover large or unexpected expenses
- Set aside proceeds for an emergency fund
What will my parents’ responsibilities be with a reverse mortgage?
Before submitting the application, there are a few items they will need to complete to ensure their eligibility and that they have a complete understanding of a reverse mortgage loan.
- They will be required to complete a financial assessment to evaluate their ability to meet their financial obligations before loan approval and closing. During the assessment, the lender will verify credit and income.
- They must also meet with a Department of Housing and Urban Development (HUD)-approved reverse mortgage counselor before applying for a reverse mortgage. The reverse mortgage counselor will discuss with them how a reverse mortgage works and the associated costs.
Once the reverse mortgage loan has been secured loan, there are a few additional requirements they will be responsible for during the life of the loan.
- If there is a mortgage on the home, they must pay it off using the proceeds from the reverse mortgage loan.3
- They also must reside in the home as their primary residence, continue to pay the required property taxes, and homeowner’s insurance, and maintaining the home according to FHA requirements.3
Who owns the home, my parents, or the bank?
Your parents. The bank does not assume ownership of their home when they take out a reverse mortgage. Your parents will still own their home and the lender secures the loan through a lien. They can then borrow against the value of the home’s equity while staying in the home and maintaining the title.4
How much money can my parents receive?
There are a few factors that are used to calculate the loan amount they can receive. It’s important to note that no lender will allow you to borrow 100% of the home’s equity. The amount of funds received from a reverse mortgage will only be a portion of the equity. The maximum dollar amount available for a federally-insured reverse mortgage is determined by using the following:
- The age of the youngest borrower on title or eligible non-borrowing spouse5
- The lesser of the appraised value of your home, sales price, or the Federal Housing Administration (FHA) lending limit ($765,500 as of 1/1/2020)
- The current interest rates
- The balance of the existing mortgage, if applicable, and other financial obligations
The rate type they choose can also influence the amount of money they will receive with a reverse mortgage. With a fixed-rate loan, the loan proceeds are received in one lump sum. With an adjustable-rate loan, they can choose between tenure (equal monthly payments that continue throughout the life of the loan), term (equal monthly payments for a specified amount of time), a line of credit, or a combination of the above.
What happens when my parents permanently leave the home?
When the last borrower on the loan permanently leaves the home, the estate or heirs will inherit the home, but there will be a lien on the title. If the heirs want to retain the property, then the full amount of the loan must be paid regardless of property value. The amount due at loan maturity is the principal borrowed plus any accrued interest and mortgage insurance premium.
As a non-recourse loan, lenders can only look to the value of the home for repayment; no other assets may be attached if the loan balance grows beyond the mortgaged home value. The heirs will not be required to pay more than the value of the home at the time the loan is repaid; even if the loan balance exceeds the value of your home provided you or your heirs decide to sell the home.
If you or your parents are interested in learning more about how a reverse mortgage may be able to help in retirement, call (800) 976-6211 to speak with a licensed loan advisor.
1 Borrowers may access the greater of 60 percent of the principal limit amount or all mandatory obligations, as defined by the HECM requirements, plus an additional 10% during the first 12 months after loan closing. The combined total of mandatory obligations plus 10% cannot exceed the principal limit amount established at loan closing. The borrower may also need to set aside additional funds from the loan proceeds to pay for taxes and insurance.
2 Your HECM loan will accrue interest that together with principal will have to be repaid when the loan becomes due
3 Your current mortgage(s) and any other existing liens against the property must be paid off at or before closing. You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance, and maintain the home according to FHA requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.
4 You will retain the title and ownership during the life of the loan, and you can sell your home at any time (at which time the loan becomes due). The loan will not become due and subject to repayment as long as you continue to meet loan obligations such as living in the home as your primary residence, maintaining the home according to the Federal Housing Administration (FHA) requirements, and paying property taxes and homeowners insurance. Failing to meet these requirements can trigger a loan default that may result in foreclosure.
5 A 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.