Is a Reverse mortgage right for you?

You’ve probably heard the term ‘reverse mortgage’ or seen an ad on TV about it at some point. Even still, you may not understand exactly what a reverse mortgage is or how it works. You’re not alone. Reverse mortgages can be confusing. The good news is getting a reverse mortgage has become much easier to understand in recent years and can offer great benefits for many people.

A lot of seniors have struggled since the recession because the nest egg they had counted on for retirement may not be enough anymore. It may seem hard to believe but the average Social Security benefits for retirees today is just $1,294 per month. When older adults don’t have access to the income they need, they might neglect their health or become isolated from family and friends. This is where a reverse mortgage may be able to help them keep their independence and regain greater control of their financial future.

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You can qualify for a reverse mortgage if:

  • You’re 62 years of age or older
  • The home must be your primary residence
  • You must have paid off most, or all, of your current mortgage

Tips and pitfalls of reverse mortgages

  •  There are no such things as AARP reverse mortgage
  •  Put both spouse names on contract so it won’t expire if one is deceased
  •  Put reverse mortgage in estate planning

Glossary Terms

FHA Loan
A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are... <a href='/glossary/what-is-fha-loan' title='See the full definition of FHA Loan'>read more</a>
Fixed Rate Mortgage
A fixed rate mortgage is a type of mortgage where the interest rate is set for the term of the loan. <a href='/glossary/what-is-fixed-rate-mortgage' title='See the full definition of Fixed Rate Mortgage'>read more</a>
Loan-to-Value Ratio (LTV)
The loan-to-value (LTV) ratio is the relationship between the amount of the mortgage loan and the appraised value of the property expressed as a... <a href='/glossary/what-is-loan-to-value-ratio' title='See the full definition of Loan-to-Value Ratio (LTV)'>read more</a>
Mortgage Insurance
Mortgage insurance is money paid to insure the mortgage when the down payment is typically less than 20 percent. <a href='/glossary/what-is-mortgage-insurance' title='See the full definition of Mortgage Insurance'>read more</a>
Title
A title is a document that gives evidence of an individual's ownership of property. <a href='/glossary/what-is-title' title='See the full definition of Title'>read more</a>
Loan Program
A loan program is the interest rate feature and the terms of your loan. <a href='/glossary/what-is-loan-program' title='See the full definition of Loan Program'>read more</a>
Home Equity
Home equity is the difference between the market value of a home and any outstanding mortgage balance. A person who has a $50,000 mortgage on a... <a href='/glossary/what-is-home-equity' title='See the full definition of Home Equity'>read more</a>
HUD
U.S. Department of Housing and Urban Development. Office of Housing/Federal Housing Administration within HUD insures home mortgage loans made by... <a href='/glossary/what-is-hud' title='See the full definition of HUD'>read more</a>
50%
of homeowners considering a reverse
mortgage are under age 70
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What is a reverse mortgage?

If you’re 62 and over, a reverse mortgage can be a great way to add income to your life and give you a greater feeling of security in your senior years. Simply put, a reverse mortgage is general a government insured loan that allows you to access the home equity in your home and convert it to cash all while you stay in your home.

This increase in supplemental income can come handy especially for people who may have experienced a reduction in income due to recession, medical concerns or other reasons and particularly for people who don’t want to burden their family with caring for them financially.

How a reverse mortgage works

The very first reverse mortgage loan was written in 1961 to a widow named Nellie Young, which allowed her to stay in her home without her husband’s income. A reverse mortgage is pretty much what it sounds like: the reverse. Instead of making monthly mortgage payments, payments are made to you. You only have to pay the taxes and insurance. Sounds like a pretty nice break right?  It certainly can be.

Today, many people can take advantage of the same reverse loan that Nellie Young got. Because your home is one of your most important assets and you’ve probably had it for a long time, it usually holds a certain amount of equity.  Because of this equity, the value of your home when it is sold in the future will be covered. In the meantime, you are able to live in the home for as long as you like with more income than you had before.

Here are the steps you need to take to get a reverse mortgage:

You must be the right age

You must be 62 years of age or older and own your home.

Consider your options

Is a reverse mortgage solution the right one for you? Or would you be better off selling your home and downsizing? These are important questions to ask. A reverse mortgage can be a great solution but is not for everyone.

Meet with a HUD Counselor

In order to apply for a reverse mortgage, you’ll need to participate in a brief counseling session. It won’t take long but it will ensure that you are prepared and empowered with the information you need. Find a HUD counselor in your area.

Apply for a reverse mortgage

Connect with lenders who can help you get the right reverse mortgage for your needs.

Get your home appraised

The amount you’ll ultimately receive as a loan will depend on the value of your home and current interest rates.

Start your retirement

Once your reverse mortgage loan is approved, you’ll be able to stay in your home and enjoy the supplemental income every month.

Remember, you always have the right to cancel.

With most reverse mortgages, you have at least three business days after closing to cancel the deal for any reason, without penalty. This is called a Right of Rescission. If you decide to cancel, make sure you notify the lender in writing and send the letter via certified mail. The lender then has 20 days to return any money you’ve paid up to that point for the financing.

Reverse mortgage lenders

Most people who get reverse mortgages get a Home Equity Conversion Mortgage (HECM), which is a government backed loan. In that case, there are plenty of lenders out there who can help you find the reverse mortgage that falls under HUD’s guidelines.

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Other types of reverse mortgage

There are some instances where people seek a mortgage such as a Jumbo or Proprietary mortgage which isn’t backed by the government.

There are private lenders willing to make reverse mortgages that don’t fall under HUD’s guidelines. For example, let’s say you need a reverse mortgage lender who offers mortgages on homes valued between $500,000 and $6 million. What then?

First, keep a few things in mind when considering a Jumbo or Proprietary Mortgage:

Reverse mortgage counseling is not required.

Only government-backed loans require counseling. The fees are not regulated the way HECM charges are so it’s really smart to make sure you work with a reverse mortgage counselor when shopping for a proprietary reverse mortgage. You can find HUD-approved reverse mortgage counselors through the National Council on Aging. Counseling costs about $125. For individuals whose income is less than $1,000 per month, counseling is free.

Fees are not limited by the government.

That’s why shopping for your reverse mortgage is crucial. get a total annual loan cost (talc) disclosure and good faith estimate (gfe) from every lender you consider. go through them carefully, with the help of a counselor if necessary.

Proprietary reverse mortgages may come with some unusual arrangements.

For example, equity sharing provisions allow the lender to take a portion of your home’s appreciation during the loan’s term as part or all of its compensation. This can be a very good or very bad deal for you, depending on how much your property appreciates. Equity sharing provisions (also called shared appreciation mortgages or SAMs) are less popular today, but you still might encounter them.

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Reverse mortgage pros and cons

Pros of Reverse Mortgage

  • Becomes a source of supplemental income

  • There are usually tax benefits

  • You’ll never owe more than what your home is worth

  • There are usually no penalties

  • The equity overage is yours

  • Receive the cash in a lump sum

  • The title to the home remains in your name

  • You can retain your home and financial independence and not have to rely on family

Cons of Reverse Mortgage

  • There could be potential Medicaid impact

  • Origination and closing fees

  • Mandatory debt counseling is a prerequisite

  • Interest rates could rise significantly over the course of the loan

  • You are still responsible for taxes and home owner’s insurance

  • Your home equity will be used

Understanding HUD, FHA and HECM

The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage or HECM, and is only available through an FHA approved lender. In the US, over 90% of reverse mortgages are HECMs.

How can HUD help me?

It’s important to discuss your reverse mortgage options with a Housing and Urban Development (HUD) counselor. You’ll be able to ask questions about how much you can borrow and you can protect yourself against loans with high fees that are not regulated by HUD.

What is an FHA Reverse Mortgage?

An FHA reverse mortgage is the same things as a Home Equity Conversion Mortgage (HECM) and is a loan insured by the United States Federal Government's Federal Housing Administration (FHA).

What is a "HECM for Purchase?"

The HECM for Purchase Program was a part of the Housing and Economic Recovery Act of 2008 enabling borrowers to purchase a new principal residence with HECM loan proceeds. How does it work? The "HECM for Purchase" applies if "the borrower is able to pay the difference between the HECM and the sales price and closing costs for the property. The program was designed to allow seniors to purchase a new principal residence and obtain a reverse mortgage within a single transaction by eliminating the need for a second closing. Texas was the last state to allow for reverse mortgages for purchase.