What is a reverse mortgage?

A Reverse Mortgage is very similar to a traditional mortgage in a lot of ways. In a nutshell, it’s a financial tool that allows you to borrow money based on the home’s value or the equity that is in your home. You still own your home and have full property rights to sell, refinance, or pay off the loan at any time. The home also goes to your heirs after you pass. In all those ways, the Reverse Mortgage is similar to a traditional mortgage; the main difference is how you pay the loan back. 

How is the Reverse Mortgage Paid Back? 

Rather than being obligated to a monthly payment over a set period of time, the Reverse Mortgage is paid off once the last borrower permanently leaves the home. This means while you are in the home, the payment is optional. You still have to pay your taxes and insurance like you do now, but you do not have to make payments on the principal or interest, meaning that money stays where its most useful, in your retirement funds. 

What is a HECM?

A HECM is the FHA insured Reverse Mortgage. There are many proprietary Reverse Mortgages that are not FHA insured, so make sure to inquire about what protections those come with to make sure any loan program you are considering is safe for you and your retirement. 

What protections does the FHA offer on the HECM?

First, it’s a non-recourse loan, meaning that the home itself is the only thing that can be used to pay back the Reverse Mortgage loan. None of your other assets, and none of your heirs will ever have to come out of pocket to pay back a Reverse Mortgage loan. All reaming equity goes to your heirs. 

The proceeds of a Reverse Mortgage are guaranteed to never be reduced or frozen due to market conditions, so long as there is a borrower living in the home and loan terms are maintained. 

Proceeds from a Reverse Mortgage are not viewed as income, they are simply loan proceeds. This mean that you will never pay income tax and the money you use from the Reverse Mortgage will not affect income-based government benefits. 

How does the Reverse Mortgage Work if I Have a Mortgage on my Home?

The first thing the Reverse Mortgage will do is pay off your existing mortgage (along with any other liens on title), and if you are eligible for proceeds after the mortgage is paid off, the proceeds can be taken as cash, monthly payments, or put on a LOC. Once your mortgage is paid off from the reverse mortgage, that payment now becomes flexible meaning you can choose to pay as much or as little as you like. 

If you choose to not make a payment, that is now cashflow that stays in your retirement funds vs paying out to the bank every month. Any unpaid interest gets added onto the loan balance to be paid back at a later date when the last borrower leaves the home, or the home is sold. 

If you choose to make a payment you will be paying into the interest, slowing or stopping the loan balance from increasing, and any amount paid into the principle will lower the balance. When you make a payment, you will be increasing the LOC dollar for dollar, so your money stays liquid and available vs paying into equity that is inaccessible.

This creates a lot of flexibility because if you ever need to stop making a payment, you can. And if you ever run into an emergency where you need the cash used to make a payment back, you can withdraw it back out of the LOC. 

How does the Reverse Mortgage Work if I have a Free and Clear home? 

If you don’t have any mortgages or liens on title, 100% of the Reverse Mortgage proceeds can be available as cash and can be set up in a few different ways: monthly payments, partial lump sum with partial LOC, or all proceeds can go into a LOC for future use. This is your equity so there are no restrictions on what the proceeds can be used for.  

How does the Line of Credit work for the Reverse Mortgage?

The RMLOC is very unique for a couple different reasons; first, the proceeds can never be cut or frozen due to value declines or market conditions and second, the LOC has a compounding growth rate for the unused portion of the LOC. 

Other line of credit products in the market can be cut or frozen at any point in time due to lender discretion. This is like getting an umbrella that gets taken away when it starts to rain hard. The RMLOC is protected by FHA insurances where so long as you maintain loan terms, the RMLOC is guaranteed to always be available to use. This provides protections and securities for the future through a concept called Equity Insurance. A lot of people will use the Reverse Mortgage as a way to guarantee a baseline level of equity that can be used in retirement. 

The other most unique features of the RMLOC is that it has compounded growth. The growth on the available LOC will always grow ½ higher than the interest rate being charged against the loan balance. This means that the available equity through the RMLOC can double in a 10-15 year period, making this a great financial planning tool when set up early in retirement.

What are the loan terms for the Reverse Mortgage?

Like any other mortgage, you must pay your property taxes, homeowners’ insurance, and maintain the property to basic standards. The home needs to be your primary residence, and at least one borrower has to be alive and living in the home. Non-borrowing spouses are allowed to stay in the home for the rest of their lives in the event that a borrowing spouse passes away. Once all borrowers and non-borrowing spouses permanently leave the home (or if other loan terms are not maintained), that is when the loan is due and payable. 

What happens to the home when the borrowers pass away with a Reverse Mortgage?

Like any other asset, upon passing away the house goes to your heirs. Depending on what your heirs plan on doing, they have multiple options to pay back the Reverse Mortgage. Remember, the home is the only asset required to pay back the Reverse Mortgage. No one will ever be required to come out of pocket to pay back the Reverse Mortgage loan. 

If your heirs plan on selling the home, they will simply list the home for sale, and once the home is sold, the Reverse Mortgage is paid back. All the remaining equity in the home goes to the heirs. If the house happened to be under water, and more was owed than the home was worth, this is where the FHA insurances kick in and pay the difference. So, you can never pass a debt down to your heirs, only remaining equity.

If your heirs want to keep the home, they will simply pay off the Reverse Mortgage balance and the home is theirs. They can do this by paying in cash, or they can get their own mortgage if they can’t afford to pay the balance in full. If the remaining balance is higher than the home’s value, the heirs can buy back the home at 95% of the appraised value. 

Regardless of what option they choose, they will have the flexibility of time. Your heirs get a 6-month timeframe to pay back the Reverse Mortgage and if they need more time, could get extensions up to a year.  

What are the requirements to get a Reverse Mortgage? 

While there are proprietary Reverse Mortgages that have an age requirement of 55 years old, to get the HECM Government Insured Reverse Mortgage, at least one spouse has to be 62 years or older and be on the title of the home at the time of application. There are property, as well as credit and income requirements for the Reverse Mortgage as well. 

What Properties are Eligible for the RM?

You can get a Reverse Mortgage on a Single-Family Residence, 2-4 unit property, FHA approved condominium, and in some cases on a manufactured home. The title/ownership cannot be in a co-op, and if it is owned by a corporation, one or all of the borrowers need at least 50% ownership of the corporation. 

For a manufactured home to be eligible, it needs to be at least 400 sq. ft. in size, built on or after June 15th 1976, and be on a permanent foundation, and must be taxed as real estate. (most lenders wont lend on single wide manufactured homes, but we do!)   

What type of income and credit requirements are there?

Like any other mortgage, you must pay your property taxes, homeowners’ insurance, and maintain the property to basic standards. The home needs to be your primary residence, and at least one borrower has to be alive and living in the home. Non-borrowing spouses are allowed to stay in the home for the rest of their lives in the event that a borrowing spouse passes away. Once all borrowers and non-borrowing spouses permanently leave the home (or if other loan terms are not maintained), that is when the loan is due and payable. 

What are the interest rates applied to the Reverse Mortgage?

There is a misconception that the Reverse Mortgage interest rates are much higher than the rates of traditional loans. What we have seen, is that Reverse Mortgage rates are typically inline with the rates of traditional loans. 

What type of fees are there with the Reverse Mortgage?

The Reverse Mortgage is going to have similar fees when compared to a traditional loan (origination fee, 3rd party fees), but the one fee you might not be used to seeing is the MIP (mortgage insurance premium). The MIP is what fuels the insurances and guarantees of this loan including:

• The guarantee that if the home is upside down, the FHA will cover the difference and you won’t pass that debt down to your heirs.

• The guarantee that the LOC can never be cut or frozen, and so long as loan terms are maintained the Reverse Mortgage proceeds will always be available.

• As long as the Property Taxes and Homeowners Insurance are paid, there are never payments required on the principle or interest of the Reverse Mortgage.