9 Key Reverse Mortgage Questions – Answered
Your golden years should be the time you finally get to sit back, relax and enjoy everything you worked for. However, as some people head into their retirement years, they discover the money they have saved isn’t enough for their wants or needs.
One way senior homeowners can supplement their income is through a reverse mortgage. A reverse mortgage allows you to tap into the equity you’ve built up on your home without having to pay back the funds with a monthly payment, as you would with a traditional home equity loan.
Recently, this has become somewhat of a controversial income stream, but at its core it’s not necessarily nefarious, so long as you know exactly what you are getting into you before you apply for one.
Indeed, there are multiple risks that come with a reverse mortgages: there are upfront closing costs to consider; the loan must be repaid if you pass away or move out of the home; it could make it more difficult to pass a home on to your heirs; and you’re reducing the equity you own in your home.
While the reverse mortgage may provide an additional source of income, you should make sure you understand each aspect of the loan before deciding whether this option will work for you.
Here are a few things you need to know before searching for a lender:
Frequently asked reverse mortgage questions
What’s the difference between a reverse mortgage and a conventional mortgage?
On a conventional mortgage, a borrower pays the bank for a loan used to purchase their property. The borrower then makes payments until they have fulfilled the terms of their loan, after which time they own the property. A reverse mortgage is exactly the opposite. The homeowner takes out a loan, using their equity as collateral, and the lender issues payments directly to the borrower.
A reverse mortgage is not a home equity loan. The balance of a reverse mortgage is not due until after the homeowner passes away or sells the house. In essence, the bank is paying you for your house.
“The biggest difference is there are no payments required. You can pay as much or as little as you want towards the loan each month,” said Craig Clayson, a senior loan officer with Security National Mortgage Company in Cottonwood Heights, Utah. “There are no prepayment penalties.”
It is important to note that there are expenses associated with having a reverse mortgage including mortgage insurance and a premium you may have to pay upfront. Some lenders may have additional fees, so make sure you understand all of the terms of your loan.
Who can get a reverse mortgage?
There are certain qualifications a borrower must meet before they are eligible to apply for a reverse mortgage.
- The borrower must be at least 62 years old and live in the home they want to take a reverse mortgage on.
- They have to own the home, meaning the mortgage is entirely paid off or has a balance low enough it can be paid off with the loan.
- Anyone living in the home (e.g. spouse, children, siblings) may apply as a co-borrower, if they are at least 62 as well. A spouse under the age of 62 may qualify as an eligible non-borrowing spouse.
- You must continue to pay taxes, insurance, and other maintenance costs on the property.
- If you are applying for an Home Equity Conversion Mortgage (HECM), the type of most common reverse mortgage, you’ll be required to meet with a financial counselor to discuss whether you qualify for this type of loan.
- You cannot be delinquent on any federal debt (like taxes).
In addition to personal requirements, to qualify for a traditional HECM reverse mortgage, the property you want to take a reverse mortgage on must also meet certain requirements. The property must be a single family home, or a two-to-four unit home with at least one unit occupied by the owner. HUD-approved condominiums and FHA-approved manufactured homes may also qualify.
How do I pay back the loan?
Usually, reverse mortgages aren’t repaid until the borrower passes away, at which time a surviving spouse or their heirs will be tasked with covering the payment. However, if you (or your loved one) move out of the home or stop using it as a primary residence, you will have to begin paying the loan back. Your loan may also be called if you stop caring for the property, or fail to make timely tax payments.
One option for repaying your reverse mortgage is to sell the home and use the proceeds from the sale to pay off your balance. Any remaining equity in the home is given to the homeowner or their beneficiaries.
For a Home Equity Conversion Mortgage, if the home sells for less than the remaining loan balance, you are only held responsible for the sales price of the home, so long as the sales price is equal to the the market value of the home. Beneficiaries may opt to refinance the loan, or pay off the balance with cash. Additionally, homeowners may opt to begin paying off the loan (without penalty), to avoid negative amortization.
Can you face foreclosure on a property with a reverse mortgage?
Yes. Even though you aren’t required to make monthly payments to a lender, you could default on the loan if you don’t keep up on your property taxes, HOA fees, or if you neglect your home. Additionally, if you move out of the home or sell it, you’ll have to repay the loan money. Failure to make those payments could also result in a default, and, ultimately, the lender could choose to foreclose.
In 2016, the Consumer Financial Protection Bureau (CFPB) ordered several lenders to change their advertising and marketing language because they were allowing borrowers to believe that they could not lose their home if they had a reverse mortgage.
When is it a good idea to get a reverse mortgage?
Reverse mortgages are typically used to supplement retirement income. They come with upfront costs, multiple risks, and because you are tapping into your equity, that will begin to decline as well. You’ll have to weigh the costs with the potential benefit.
Terri Boam, an HECM counselor with AAA Fair Credit in Salt Lake City said that there are several reasons borrowers choose a reverse mortgage — these include the death of a spouse, which reduces their social security income; a medical emergency and eliminating house payments.
“In most cases, borrowers are having difficulty in making their current mortgage. The idea is that the house will still build equity (even though they’ve taken out a loan), so there will be enough money to pay off the loan if they have to sell,” Boam said.
Boam said other buyers opt to use a reverse mortgage to purchase a property. The borrower would provide at least 50 percent of the purchase price and receive monthly payments from the reverse mortgage instead of making a mortgage payment.
To maximize the benefits, borrowers should consider whether they want to leave the home to their estate upon their passing, and if a loved one, like a spouse or other dependant, would be at risk of losing their home once the borrower has died.
Any surviving borrower or qualifying non-borrowing spouse must still reside in the home, maintain the property, and make property tax payments or the lender can require the loan be paid in full.
A reverse mortgage may be a useful way to make sure you have enough money to take care of your needs now. A reverse loan works best for homeowners who:
- Plan to spend at least the next several years in the home
- Are able to continue to care for the property
- Have enough funds to pay any property taxes and HOA fees
Reverse mortgages allow the homeowner to retain ownership of their home, without making monthly payments. Some borrowers who still owe some money on their home, but are struggling to make monthly payments, may opt for a reverse mortgage to pay off the balance of their home loan. This can relieve some anxiety, as the borrowers won’t have to make any payments on the loan, although the heirs will be responsible for paying off the loan or selling the home.
But a reverse mortgage isn’t for everyone, according to Boam. “There are a lot of upfront costs including an origination fee and two percent of the mortgage price, wrapped into the loan,” she said. “If the person is not able to stay at least five years, then they’ve incurred an expensive mortgage product for very little return on their investment.”
There are different borrowing options (including lump sum, monthly payments, or lines of credit). Understanding how each of these work could allow you to maximize the benefit, while reducing financial risk for your family.
What happens to the home after my death?
The balance of the loan is due on your reverse mortgage after you die. If you have an estate, your beneficiaries can pay off the balance due on the loan and keep the home, or the bank will take possession of the home as repayment.
If anyone is living in the home after you die, they may have to move out. If they are a co-borrower or a qualifying non-borrowing spouse, they may be able to stay in the home until they die or move away.
Further, anyone living in your home who is not a co-borrower or qualifying non-borrowing spouse may have to leave your home if you move out of the home for a year or more (like moving to assisted living).
“If there are no heirs and no trust or will, then the home wouldn’t be paid off. The property would likely go back to HUD, if there are no beneficiaries to claim the property,” Clayson said.
If the surviving heir chooses to sell the home and the home sells for more than what is owed, the heir will receive any amount that exceeds the loan repayment.
Who is responsible for the mortgage if I die before I pay it off?
If you die before you pay off your reverse mortgage, your estate is responsible for covering the loan. The person controlling your estate can do this by selling the home, paying off the balance some other way, or refinancing the home and taking on the loan payments themselves.
If you have a co-borrower or a qualifying non-borrowing spouse living after you pass away, they may be able to continue to live in the home without paying the loan, providing they continue to meet the requirements set up in your reverse mortgage.
What types of fees can I expect with a reverse loan?
Reverse loans aren’t free. While reverse mortgages can be beneficial to older homeowners, lenders have to make money somehow. One way they earn from a reverse loan is through fees. Fees you can expect on an HECM include a loan origination fee (capped at $6,000), a servicing fee (capped at $35 for adjustable rate loans and $30 for fixed rate), third party charges (appraisals, title searches, insurance, inspection, recording fees, and credit checks), and your mortgage insurance premium.
Your lender may allow some of these expenses (like the mortgage insurance premium) to be rolled into the loan total.
What’s the most important thing to know about a reverse mortgage?
The most important thing a borrower can do is to make sure they are educated about all of their options. Clients opting for a reverse mortgage may be required speak with a financial counselor to make sure they understand the process.
“The biggest thing is making sure you understand what happens when you vacate the property or stop paying taxes and insurance,” Clayson said.
A reverse mortgage can be a extra source of income in your retirement years. It’s a big decision, so borrowers should take the necessary time to look at all of their options and speak with different lenders before moving forward. As a borrower you should be aware that there are other alternatives to a reverse mortgage that may better suit your needs. Things you might consider include:
- Reworking your budget or taking on a small side job to increase your income
- Selling your home for a smaller or less expensive living space
- Refinancing your current home loan
- Taking out home equity line of credit
Factor in every aspect of your decision (including your ability to make appropriate tax payments, and maintenance of your property) before relying on this type of loan.