A reverse mortgage enables homeowners (age 62+) to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you.
Below are some common questions asked by consumers about reverse mortgages.
Am I eligible for a reverse mortgage?
To qualify for a reverse mortgage you must:
- Be at least 62 years of age
- Be a homeowner with equity in your home
- Occupy the home as your primary residence
How much money can I get?
The amount of money you can get depends on your age, appraised home value, current interest rates and other features. The older you are and the more valuable your home (and the less you owe on your home), the more money you get. The national lending limit is $625,500.
What is the interest rate on a reverse mortgage and how is it determined?
Interest rates may be fixed or adjustable. Nearly all adjustable rates are now based on the LIBOR index.
What are my payment options?
You can choose to receive the money from a reverse mortgage all at once as a lump sum, fixed monthly payments (for up to life), as a line of credit, or a combination of these. The most popular option – chosen by more than 60 percent of borrowers – is the line of credit, which allows you to draw on the loan proceeds at any time.
What fees are associated with reverse mortgages?
Many of the same costs that someone pays to obtain a traditional mortgage can be expected, e.g., origination fee, mortgage insurance, appraisal fee and closing costs. However, in most cases, these fees and costs are capped and may be financed as part of the loan.
Does my home qualify?
Eligible property types include single-family homes, condominiums, and townhouses.
How can I use the proceeds from a reverse mortgage?
The proceeds from a reverse mortgage can be used for anything. Some common uses are supplementing retirement income to cover daily living expenses, repairing or modifying your home (e.g., widening halls or installing a ramp), paying for health care, buying a new car or taking a "dream" vacation.
What if I have an existing mortgage?
You may qualify for a reverse mortgage even if you still owe money on an existing mortgage. However, the reverse mortgage must be in a first lien position, so any existing mortgage must be paid off. You can pay off the existing mortgage with the reverse mortgage, or any other savings.
For example, let's say you owe $100,000 on an existing mortgage. Based on your age, home value, and interest rates, you qualify for $125,000 under the reverse mortgage program. Under this scenario, you will be able to pay off ALL the existing mortgage and still have $25,000 left over to use as you wish.
If, however, you only qualify for $85,000, then you would need to come up with $15,000 from your savings to get the reverse mortgage. Even then, all the money from the reverse mortgage will have been used to pay off the existing mortgage. On the other hand, you won't have a monthly mortgage payment.
Will I lose my government assistance if I get a reverse mortgage?
A reverse mortgage does not affect regular Social Security or Medicare benefits. However, if you are on Medicaid, any reverse mortgage proceeds that you receive must be used immediately. Funds that you retain would count as an asset and could impact Medicaid eligibility. For example, if you receive $4,000 in a lump sum for home repairs and spend it all the same calendar month, everything is fine. Any residual funds remaining in your bank account the following month would count as an asset. If the total liquid resources (including other bank funds and savings bonds) exceed $2,000 for an individual or $3,000 for a couple, you would be ineligible for Medicaid. To be safe, you should contact the local Area Agency on Aging or a Medicaid expert.
Do I need to get counseling?
Yes. Counseling is one of the most important consumer protections built into the program. It requires an independent third-party to make sure you understand the program, and review alternative options, before you apply for a reverse mortgage.
You can seek counseling from a local HUD-approved counseling agency, or a national counseling agency, such as AARP (800.209.8085), National Foundation for Credit Counseling (866.698.6322), and Money Management International (877.908.2227). Counseling is required for all reverse mortgages and may be conducted face-to-face or by telephone.
By law, a counselor must review (i) options, other than a reverse mortgage, that are available to the prospective borrower, including housing, social services, health and financial alternatives; (ii) other home equity conversion options that are or may become available to the prospective borrower, such as property tax deferral programs; (iii) the financial implications of entering into a reverse mortgage; and, (iv) the tax consequences affecting the prospective borrower’s eligibility under state or federal programs and the impact on the estate or his or her heirs.
When do I pay back my loan?
No monthly payments are due on a reverse mortgage while it is outstanding. The loan is repaid when you cease to occupy your home as a principal residence, whether you (the last remaining spouse, in cases of couples) pass away, sell the home, or permanently move out. The amount owed can never exceed the value of your home. Furthermore, if the home is sold and the sales proceeds exceed the amount owed on the reverse mortgage, the excess money goes to you or your estate.
Under what circumstances should I not consider a reverse mortgage?
Because of the upfront costs associated with a reverse mortgage, if you intend to leave your home within 2-3 years, there may be other less expensive options to consider, such as home equity loans, no-interest loans or grants that may be offered by your county government or a local non-profit to repair your home, or a tax deferral program, if you're having problems paying your property taxes.