As more people learn about the versatility of reverse mortgages, this financial planning tool has gained significant popularity. Today, record numbers of consumers are using reverse mortgages to remain in their homes to supplement their retirement income, pay for health care expenses, make home modifications, or simply establish a cash reserve for emergencies.
Despite increased popularity, even some of the most basic facts about reverse mortgages are often misunderstood. According to Peter Bell, President of the National Reserve Mortgage Lenders Association, a relatively short industry history and rapid product evolution have deluged customers with information that at times is confusing or inaccurate.
The most common misconception we hear is "A reverse mortgage is when a bank gives you some money and then takes your house", says Bell. That couldn't be further from the truth. Our mission, Bell explains, is to inform seniors about the benefits of reverse mortgages so that they can make informed decisions about whether this product makes sense for their own particular situation.
This guide provides answers to the most common questions asked by consumers. The questions are broken into three categories: those appropriate to ask before getting a reverse mortgage; those applicable after getting a reverse mortgage; and those applicable when a reverse mortgage needs to be repaid.
Other guides published by the NRMLA include Using Reverse Mortgages for Health Care: A NRMLA Guide for Consumers and the NRMLA Guide to Aging in Place. Both may be viewed on our website (http://www.reversemortgage.org) along with detailed information about different reverse mortgage products and a state-by-state listing of reverse mortgage lenders.
Answers to Common Questions about Reverse Mortgages
- Q: Am I eligible for a reverse mortgage?
- A: To qualify for a reverse mortgage, you must:
- Be at least 62 years old. In the case of a couple or co-owners, both must be 62 if their names appear on the title to the home.1
- Be a homeowner with equity in your home. You must qualify even if you have an outstanding balance on your first mortgage. Single-family homes and qualified condominiums, townhouses, manufactured homes, and 1-to-4 family owner occupied residences are eligible. Reverse mortgages are available only for homes occupied by owners as a principal residence.
- 1 If one spouse or co-owner is under 62, that person’s name must be removed from the title so that the other person can qualify for the reverse mortgage.
- Q: How much money can I get?
- A: This depends on a few factors, including your age, the value of your home, the amount of built-up home equity, and interest rates at the time of origination. Other factors are the type of reverse mortgage product and particular payment option you select. A calculator that can help estimate how much you could receive under different products and payment options is available at NRMLA’s website (http://www.reversemortgage.org), and from most reverse mortgage lenders and counselors.
- Q: What are my payment options?
- A: You decide how to receive the money generated by a reverse mortgage. Your payment options are:
- An upfront lump sum payment:
- Line of credit;
- Fixed monthly payments for as long as you remain in your home (or a predetermined, shorter period); or, if you choose,
- A combination of monthly income and line of credit.
- Q: How much does a reverse mortgage cost? What are the upfront and closing fees?
- A: Many of the same costs associated with a regular mortgage apply to reverse mortgages. You will be charged an origination fee, a mortgage insurance premium (for FHA Home Equity Conversion Mortgages), an appraisal fee, and certain other standard closing costs. In most cases these fees and costs are capped and may be financed as part of the reverse mortgage, so that you incur little out-of-pocket expense.
- Q: Do I need to get an appraisal of my home to get a reverse mortgage?
- A: Yes. Since the value of your home is a factor in determining how much money you can get from a reverse mortgage, an appraisal is required. Normally the lender will order the appraisal, which is paid for by the borrower at the time of application.
- Q: Do I need a lawyer to apply for a reverse mortgage?
- A: Legal counsel is not required. However, NRMLA encourages you to seek advice of a legal, tax, or financial advisor before committing to a reverse mortgage.
- Q: Am I required to receive counseling before I get a reverse mortgage?
- A: Yes. Counseling is required for all three reverse mortgage products currently available in the marketplace. The counselor’s job is to make sure you are informed about reverse mortgages and other options. You can get the name of a local counseling agency or qualified telephone counselor from a reverse mortgage lender or by calling the National Foundation for Credit Counseling (866-698-6322), Money Management International (877-908-2227), AARP (800-209-8085), or HUD’s Housing Counseling Clearinghouse (800-569-4287).
- Q: Are reverse mortgages proceeds taxable income, and can they affect my Social Security or governmental benefits?
- A: Funds from a reverse mortgage are tax-free; it’s your money, not additional income. A reverse mortgage does not affect regular Social Security or Medicare benefits. However, if you receive a lump sum payment from a reverse mortgage, any amount retained the month after you get it would count as a resource and could affect Medicaid eligibility. To be safe, consult a reverse mortgage lender, or a Medicaid expert.
- Q: Who owns title to my home while my reverse mortgage is outstanding – the bank or me?
- A: You retain the title to your home during the period when you have a reverse mortgage, just the same as with a regular home purchase mortgage.
- Q: Am I required to pay anything during the course of the reverse mortgage loan?
- A: No. The flow of payments is reversed during the term of the reverse mortgage – the lender pays you. However, you are responsible for keeping up payments on your homeowner’s insurance and property taxes, and to maintain the condition of your home.
- Q: Are there any limits on how I can use the funds from a reverse mortgage?
- A: No. Borrowers have used reverse mortgages for a variety of purposes, such as paying health care expenses, supplementing retirement income, financing home repairs or modifications, or visiting friends and family. Some have used a reverse mortgage to purchase recreational vehicles, start a small business, and travel. Others have used reverse mortgages to eliminate expenses by paying off mortgages and credit card debt. The only limit on how you use a reverse mortgage is your imagination.
- Q: What is the interest rate on a reverse mortgage and how is it determined?
- A: The interest rate varies by type of reverse mortgage.
- For the HECM, the most popular product, the interest rate is adjusted either monthly or annually (the borrower chooses) and based on an index called the “1-Year U.S. Treasury Constant Maturity Rate,” which changes weekly.
- For monthly adjusting HECMs, the interest rate currently charged is equal to the 1-Year Treasury rate plus 1.5% (As of September 6, 2006)
- For annually adjusting HECMs, the interest rate currently charged on the loan for the next year is equal to the current 1-Year Treasury rate plus 3.1%. (As of September 6, 2006)
- For Fannie Mae Home Keeper loans, the interest rate charged on the loan for the next month is equal to the current “1-Month Certificate of Deposit Secondary Market Rate” plus 3.4%.
- For the Cash Account “jumbo” loan, the interest rate charged on the loan for the next six months is equal to the current LIBOR rate (London InterBank Offered Rate) plus a margin.
- The latest 1-Year Treasury rate and 1-Month CD rate are issued by the Federal Reserve Board, and are published – along with the LIBOR rate – in financial newspapers. Interest charged on a reverse mortgage is “accrued”. That is, there is no payment of interest until the loan comes due.
- Q: How much will be owed when my reverse mortgage comes due?
- A: The amount owed to the lender typically includes the amount borrowed to date, the amount of accrued interest, accrued mortgage insurance premiums (for the HECM), servicing fees, and any other costs and fees financed as part of the loan amount. In no event will the repayment amount exceed the value of the home at the time the loan comes due. There are no prepayment penalties for the current reverse mortgage products.
- Q: What happens if I move out of my house after I get a reverse mortgage?
- A: You may live outside your home for up to 12 consecutive months before the loan must be repaid. In general, a reverse mortgage comes due when the borrower dies, permanently moves out, or sells the home.
- Q: What happens when my house gets passed to my heirs?
- A: Once your home is passed to your heirs, the reverse mortgage comes due. Your heirs may either pay the balance due on the reverse mortgage and keep the home, or sell the home and use the proceeds to pay of the reverse mortgage. If they sell the home, they get to keep any excess sales proceeds.
- Q: And most important – Where can I get a reverse mortgage?
- A: Reverse mortgages are offered mostly by private, specialized lenders. For a list of lenders who belong to NRMLA who offer reverse mortgages in your state, visit NRMLA’s website, http://www.reversemortgage.org (Click on Locate a Lender), or call NRMLA, 1-866-264-4466. Note: All members of NRMLA agree to the organization’s Code of Conduct – so you can be confident that NRMLA members will treat you fairly and respectfully.
Cypress Home Loan Corporation is HUD approved lender as well as a member of the National Association of Reverse Mortgages. We have assisted Americans with nearly $2-billion in financial services and products. Our counselors are available to answer any questions you may have. We are here to give you and your family the facts about this beneficial government –approved financial product, created specifically as the benefit for seniors. After all, each of our clients we assist has the same goal…improving the quality of life.
