What is a Reverse Mortgage?
How Is It Different?
In a traditional mortgage, a lender provides a borrower with a loan, and the borrower makes payments on it. The more the loan balance decreases, the more the home equity increases.
With a reverse mortgage—also called a home equity conversion mortgage (HECM)—the process is the opposite. The lender makes payments to the borrower against the value of the home, thereby converting home equity into cash. The greater the loan balance, the lower the amount of home equity.
Exclusively for seniors who are a minimum of 62 years old who intend to live in the property as their primary residence, the vast majority of reverse mortgages are insured by the Federal Housing Administration (FHA). Reverse mortgages provide a source of income and eliminate the need for monthly house payments. Property taxes and insurance, as well as maintaining the property according to FHA regulations are still the responsibility of the homeowner, however.
The size of the loan is determined by:
- Age of the youngest home owner
- Interest rate (which can be either fixed or variable)
- Appraisal value of the property
How Are Funds Distributed?
The loan is available as a lump sum, a line of credit, monthly payments to the borrower, or in a combination of a line of credit and monthly payments.
How Can Reverse Mortgages Be Used?
The money or credit line you get from a reverse mortgage can be used to:
- Pay for living expenses, medical bills and home renovations
- Pay off an existing mortgage
What Types of Reverse Mortgages Are Available?
There are three kinds of reverse mortgages:
- Federally Insured (HECM)
Who Is Eligible?
- Be a minimum of 62 years old
- Be mentally competent
- Intend to use the property as their primary residence
- Be free of federal debt
- Not be in the process of declaring bankruptcy (or intending to do so)
- Get an FHA appraisal
What Kinds of Properties Are Eligible?
Reverse mortgages are available for certain types of properties. These include:
- Most single-family homes
- Two-to-four-unit owner-occupied dwellings or townhouses
- Approved condominiums
- Manufactured homes
The home must meet FHA minimum property standards.
When and How Does a Reverse Mortgage Get Paid Off?
Whereas payments are required from the start of a conventional mortgage, a reverse mortgage loan does not become due until six months after the last homeowner sells, dies or moves out of the property. (loan may also become due if payments for property taxes or homeowners insurance are not being made.)
If the borrowers (or their heirs) choose not to keep the property, they may sell the home. The home equity is used to pay off the loan balance. If the home equity is less than the loan balance, the deficit is covered by FHA insurance. In the opposite scenario (the value of the property exceeds the loan balance), the remaining equity belongs to the borrowers (or their heirs).
In the event the homeowners (or heirs) decide to keep the property, they may simply pay off the loan balance. If the value of the home exceeds the loan balance, the surplus is theirs to keep.
Special rules apply to help beneficiaries (heirs) in the event the loan balance exceeds the value of the home. Please consult us for details.
How Will It Affect My Estate?
Because a reverse mortgage is a non-recourse loan, neither the loan holders nor their heirs are ever responsible if the property value is less than the loan balance. Any remaining equity belongs to the beneficiaries of the estate.