If you’re a homeowner over 62 years of age, and you’re looking for ways to supplement your income in retirement, you might qualify to convert a portion of your home’s equity into cash via a reverse mortgage home loan. Because there are no restrictions on how these funds can be spent, many seniors take out reverse mortgages to supplement their incomes in retirement. This money can be used to fund medical expenses, make improvements to their homes, or even to travel.
While there are a variety of reverse mortgages available—like single-purpose reverse mortgages or proprietary reverse mortgages—this article will focus on the the most popular option: the Home Equity Conversion Mortgage, also known as HECM. HECM reverse mortgages are backed by the U.S. Department of Housing and Urban Development, making them the only federally-insured reverse mortgage available on the market. Even though they can be helpful for some retirees, reverse mortgages aren’t the best option for everyone. It is vital to do your research and get advice from a financial professional before making any final decisions.
How do reverse mortgages work?
While traditional home loans require borrowers to pay monthly payments on the principal and interest, with a reverse mortgage, the lender pays you. If you’ve been building equity in your home by making regular mortgage payments, and you are over 62, a HECM reverse mortgage will allow you to borrow against that equity.
With a HECM, borrowers are not obligated to repay their loans until they are no longer using the home as their primary residence. You will, however, retain the title of your home, and are still responsible for paying real estate taxes, utility payments, and premiums for flood and other hazard insurances.
With a reverse mortgage, you will never owe more than the value of your home at the time the loan is repaid. HECM reverse mortgages are “non-recourse” loans, which means that the lender cannot seize your other assets in order to reclaim the balance of your loan if you default or are unable to repay it.
However, as the lender continues to make payments to you, your debt will increase, and the interest accrued is added to the principal loan balance each month. As this interest compounds, the balance of your loan will grow exponentially month after month, and a large portion of your home’s equity will go toward paying this interest. For this reason, it is important not to borrow any more money than you need.
How is the reverse mortgage loan paid?
There are a few options for receiving the payout on your HECM reverse mortgage.
If you elect the single disbursement option, you will receive your payment immediately as a lump sum on the first day of the loan. It is worth nothing that your payment amount will typically be lower if you elect the single disbursement option.
You can also receive fixed payments on a monthly basis for a determined amount of time (known as a “term” option), or for as long as you live in the home (known as a “tenure” option). Yet another payout option is through a line of credit, which would allow you to draw funds from the loan at any time—and for any amount—until the line of credit has been exhausted. You also can elect to receive your payments using a combination of the single disbursement and monthly payment options.
What can a reverse mortgage loan be used for?
As mentioned before, there are no restrictions in place that dictate what the money paid to you by the lender can be used for. You can use those funds to pay for living expenses, cover your medical costs, to book your next vacation, or to pay off credit card debt.
You could even elect to use the funds to purchase a new primary residence. To do this, you would need to have enough cash on hand to pay the difference between the HECM proceeds and the sales price (in addition to the closing costs on the home).
Do I qualify for a HECM reverse mortgage?
If you are over 62, own your home outright (or have a low enough balance on your mortgage to be paid off with the proceeds of the loan at closing), you are eligible for a HECM loan. In the case that you would be paying off the remainder of your mortgage with the proceeds of the loan, you will also need to have the financial resources to pay ongoing property charges (including taxes and insurance payments).
Is my home eligible?
Single-family homes, 2-4 unit homes (in which one unit is occupied by the borrower), and HUD-approved condominiums and manufactured homes that meet FHA requirements are all eligible.
How much will I receive for my home?
The amount you will receive will depend on a few factors, including:
- the age of the youngest borrower, (older borrowers will typically secure higher loans);
- the current interest rate, (in general, the amount of the loan will increase as interest rates decrease); and
- the value of the home.
The amount you receive will also depend on the lender offering it, so it is worthwhile to speak with multiple lenders in order to find the best deal.
How do I apply?
Before you can apply for a HECM, you are required to meet with a counselor from a government-approved housing counseling agency, who is obligated to explain both the costs and implications of the loan, as well as the alternatives that are available to you. A list of counselors is available here on the HUD website, or you can call the agency at 1-800-569-4287. You’ll want to go into this meeting informed, so make sure you do your research and come prepared with any questions you have.
When you have shopped around, compared rates, and chosen the lender you’d like to move forward with, you may have to pay an application fee to begin the process.
What fees or cost might I be required to pay?
There are various costs and fees that you may be liable to pay throughout the process of securing a reverse mortgage loan.
Prior to the origination of the loan, the aforementioned application fee is the only cost that a lender is allowed to charge you, and it must be designated as such; it cannot be a percentage of the principal amount of the reverse mortgage or of the amount financed.
At origination, which occurs when the lender qualifies you for the loan, appraises the home in question, processes your documents, and begins processing your payments, you may be charged other fees, such as: a loan origination fee, a fee for the preparation of necessary documents, or the cost of obtaining your credit report, among others.
Throughout the lifetime of your loan, the lender’s ability to charge you additional fees is limited. A lender may only charge you:
- A monthly servicing fee (a maximum of $30)
- The costs associated with real estate taxes or maintenance of the home’s structural integrity
- The costs of additional mortgage or property insurance
- The costs of any appraisal for the refinancing or extension of your loan
At the end of your loan, you may be charged a termination or maturity fee, which would include the costs associated with arranging for the sale or foreclosure of the property, which could include everything from advertising costs to broker’s fees.
When and how is the reverse mortgage loan repaid?
While you continue you living in your home, you are typically not required to make payments toward the principal or interest. However, there are some noteworthy exceptions to be aware of.
- If you have a “tenure” loan, it will mature upon the death of the last surviving borrower, or when the borrower sells the home or fails to live in it for 12 months in a row.
- If you make a change that the lender decides could affect the security of your loan–such as changing your zoning classification or adding a new owner to the title–you may have to repay the loan.
- If you fail to pay your property taxes or insurance premiums, or if you do not adequately maintain the property, lenders can opt to reduce your loan advances in order to cover these costs.
At the end of the loan, the amount you owe will be calculated by adding the total amount borrowed (including any amounts used to pay fees or costs) plus any interest accrued. If you sell the house, you can use the money you make in the sale to repay the loan. In the case that the value of the home is more than the balance of the loan, you or your heirs will get to keep the remainder of the money earned in the sale of the home. Otherwise, the homeowner (or their heirs) can repay the loan or take out a new forward mortgage on the home.
What if I change my mind?
You’ll want to do as much research and feel as confident in your decision as possible prior to applying for a reverse mortgage. If you do have a change of heart after going through the process, you will only have three business days after the closing of your reverse mortgage to cancel the agreement, and you cannot cancel by phone, email, or even in-person by word of mouth. Your cancellation must be filed in writing, using a form provided by your lender, or by letter, fax, or telegram which can be hand-delivered, mailed (in which case it must be sent before midnight of the third business day), or faxed.