What is a Reverse Mortgage?

In 1988, the Department of Housing and Urban Development (also known as H.U.D.) started a pilot program to help seniors more easily convert the equity in their homes to cash. Today, the Reverse Mortgage Program is now one of the fastest growing segments of the mortgage industry.

Reverse Mortgages: What are they about?   
A reverse mortgage enables older homeowners (62+) to borrow against the equity in their homes 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. With a reverse mortgage, you are charged interest only on the proceeds that you receive. Most reverse mortgages charge a variable interest rate (although fixed rate products are entering the marketplace) that is tied to an index, such as the 1-Yr. Treasury Bill or the London Interbank Offered Rate (LIBOR), plus a margin that typically adds an additional one to three percentage points onto the rate you're charged. Interest is not paid out of your available loan proceeds, but instead compounds over the life of the loan until repayment occurs.

Are There Any Special Requirements to Get a Reverse Mortgage?
There are no special income or medical requirements to get a reverse mortgage except being 62 years or older.

How can you turn the equity into cash and not have to make a payment on the Reverse Mortgage?
The government understands that most seniors are on a fixed income and they deserve to access money from the equity in their home, but that left one problem. Seniors cannot afford to take on the expense of a monthly payment. With a Reverse Mortgage, we loan you a portion of your equity, and require no payment while you reside in the property. Following the death of the last surviving spouse, your children will sell or refinance the home, pay back the Reverse Mortgage, and will keep the left over profit.

How Much Money Can I Get from a Reverse Mortgage?
The amount of funds you are eligible to receive depends on your age (or the age of the youngest spouse in the case of couples), the appraised home value, interest rates, and in the case of the government program, the lending limit in your area. In general, the older you are and the more valuable your home (and the less you owe on your home), the more money you can get.

Does My Home Qualify for a Reverse Mortgage?
Eligible property types include single-family homes, 2-4 unit properties, manufactured homes (built after June 1976), condominiums, and townhouses. In general, cooperative housing is ineligible.

What are My Payment Plan Options for a Reverse Mortgage?
You can choose to receive the money from a reverse mortgage all at once as a lump sum, fixed monthly payments either for a set term or for as long as you live in the home, 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.

My Understanding is that the Unused Balance in the Line of Credit Option Has a Growth Feature on the Reverse Mortgage. Does that Mean I'm Earning Interest?
No, you're not earning interest like you do with a savings account. The growth factor, which is equal to roughly the interest that you're being charged, takes into consideration that your home has appreciated in value over the past 12 months and that you are one year older.

How Can I Use the Proceeds from a Reverse Mortgage?
The proceeds from a reverse mortgage can be used for anything, whether its to supplement retirement income to cover daily living expenses, repair or modify your home (i.e., widening halls or installing a ramp), pay for health care, pay off existing debts, buy a new car or take a "dream" vacation, cover property taxes, and prevent foreclosure.

How Does the Interest Work on a Reverse Mortgage?
With a reverse mortgage, you are charged interest only on the proceeds that you receive. Most reverse mortgages charge a variable interest rate (although fixed rate products are entering the marketplace) that is tied to an index, such as the 1-Yr. Treasury Bill or the London Interbank Offered Rate (LIBOR), plus a margin that typically adds an additional one to three percentage points onto the rate you're charged. Interest is not paid out of your available loan proceeds, but instead compounds over the life of the loan until repayment occurs.

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 indebtedness must be paid off. You can pay off the existing mortgage with a reverse mortgage, money from your savings, or assistance from a family member or friend.

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 own 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 anymore.

If you find yourself in a deficit situation where you don't have enough money to pay off the existing mortgage, you may use funds from a grant or gift from a family member or friend to cover the gap, but you cannot incur a new debt obligation (i.e., loan).

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 $5,000 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.

Why Do I Need to Get Counseling once I start the Reverse Mortgage procedure?
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.

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 Reverse Mortgage 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?
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.

If your home currently has a mortgage on it, a reverse mortgage will pay-off the existing loan-with the benefit being that the monthly payment on the existing loan goes away. Additionally, it’s possible you will also receive a substantial amount of cash as well.