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About Reverse Mortgages
Reverse mortgages provide qualified homeowners access to home equity, while retaining ownership of their home. These loans are designed to provide increased liquidity, accessibility and flexibility for homeowners 62+ with additional jumbo loan options for those 55+ with homes in excess of $970,800.
The loan is called a “reverse mortgage” because instead of making monthly payments to a lender – as with traditional mortgages, the lender pays the borrower.
With a variety of payout options, reverse mortgages are among the most versatile type of loans available.
The amount that will be available for withdrawal varies by borrower and depends on the following:
- The age of the youngest borrower or eligible non-borrowing spouse is used to determine the amount you can access.
- Current interest rates; and
- Lesser of appraised value or the HECM FHA mortgage lending limit
Borrowers are not required to pay back the loan until the home is sold or the last remaining homeowner permanently vacates the home. They can, however, make payments for any amount at their discretion without penalty.
As with any mortgage loan, borrowers must meet loan obligations: paying property taxes and homeowner’s insurance and maintaining the home. They also must live in the home as their primary residence.
*Borrower(s) responsible for property taxes, home owners insurance and home maintenance. Proprietary loan options available in select states only.
Additional Details
- All FHA HECM borrowers must be at least age 62 and non-government reverse borrowers must be at least age 55 in most states. However, a younger non-borrowing spouse may stay in the property after the death of the eligible borrowing spouse, so long as the loan requirements are met. Some states do not permit a non-borrowing spouse on a reverse mortgage loan so it’s important to check with one of our reverse mortgage specialists.
- You must own the home.
- The home must be the primary residence for the life of the reverse mortgage. Vacation homes or rental properties are not eligible.
- The financial assessment requires lenders to evaluate the borrower’s ability and willingness to comply with terms over the life of the loan. They will look at the borrower’s credit history and income streams to determine whether they are capable to meet the loan requirements.
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Borrowers with credit challenges or limited income may still be able to obtain a reverse mortgage loan. A Reverse Mortgage LESA (Lifetime Expectancy Set-Aside) involves carving out a portion of the principal limit (the total pool of funds available) into a set aside account that is preserved solely for the payment of property charges. The exact amount of the carve out varies widely from borrower to borrower because it is based on age and how much property taxes and insurance cost.
If property charges are low, the total reverse mortgage LESA carve out tends to be low. If property charges are high (such as in areas where property taxes are high), then the LESA can be a pretty substantial portion of the loan proceeds.
- Age Qualification: All borrowers listed on title must be at least age 62 for a FHA HECM loan or at least 55 in most states for non-government reverse mortgage loan. If a spouse is younger, it still might be possible to get a loan. Your loan officer will need to collect additional information up front to determine eligibility.
- Primary Lien: A reverse mortgage must be the primary lien on the home. Any existing mortgage or loan secured by the home must be paid off using the proceeds from the reverse mortgage or other assets.
- Taxes and Insurance: Borrowers must remain current on real estate taxes, homeowner’s insurance, and other mandatory obligations, including HOA or condominium fees.
- Property Condition: Borrowers are responsible for completing repairs and maintaining the condition of the property.
- Income: Borrowers must meet residual income requirements. Residual income is defined as the income left over at the end of the month after paying debts, property charges, and estimated maintenance and utilities.
- Single-family home or 2-4-unit home with one unit occupied by the borrower
- HUD-approved condominium project
- Individual Condominium Units that meet FHA Single Unit Approved requirements
- Manufactured home that meets FHA requirements
Borrowers must pass a financial assessment, which includes verification of income, assets, monthly living expenses and credit history. They must also demonstrate timely payment history with regards to real estate taxes and insurance.
- Age of the youngest borrower or eligible non-borrowing spouse
- Current interest rates; and
- Lesser of appraised value or mortgage lending limits – HECM FHA Mortgage: $822,375 | Jumbo Reverse Mortgage: Up to $3 million on a $10 million value
- Most costs can be financed in the loan, and include
- Government fee – mortgage insurance premiums (initial and annual) – only on federally-backed reverse mortgage loans
- Third party charges – title, municipality, counseling and appraisal fees.
- Origination fee – subject to lender
Other fees may apply
*Not a commitment to lend. Other conditions or requirements may apply. All loans subject to underwriter approval. Proprietary loan options available in select states only.
Long-Term Care Facts
- Ten thousand people per day are turning 65 and that will continue until the year 2030*.
- Seven out of 10* of these people will require some level of long-term or extended care in their lifetime.
- The need for help may begin with housekeeping, preparing meals, shopping, managing personal finances, using the telephone, or transportation to and from doctors’ appointments.
- More than half of us* will also need help with bathing, dressing, eating, transferring and toileting or supervision due to Alzheimer’s, dementia, stroke or head injury.
- The monthly average cost of home care was $4,385 in 2019. By 2039, this cost could rise to almost $8,000 per month. Residential care in assisted living costs about the same. If care in a skilled nursing home is required, these numbers could skyrocket.**
Funding Long-Term Care
As one of the nation’s only reverse mortgage professionals to hold the Certified in Long-Term Care® designation, Steven is uniquely qualified to discuss the subject of longevity and the consequences of caregiving on families – emotionally, physically and financially – years down the road.
It’s important to point out that extended care is not a place or condition; rather, it is a life changing event. Failure to plan accordingly could have devastating effects on both the person in need and the ones they love most.
Without proper measures in place ahead of time, family and loved ones may be forced to step in, potentially jeopardizing their mental and physical well-being. Care options – especially for care at home – may be limited, and the quality of care can be compromised.
If you think that you or a loved one may live a long life and require care, accessing home equity with a reverse mortgage may help.
*Borrower(s) responsible for property taxes, home owners insurance and home maintenance. Proprietary loan options available in select states only.
Involve Family & Caregivers
Understanding extended care and what proactive decisions should be made allows us to better serve the needs of our clients. Ultimately, it can be in your best interest to pay for care or even fund long-term care insurance by converting a portion of home equity with a reverse mortgage.
Everyone’s situation is unique and it’s important to carefully explore all options before making any financial decision. Do your research with the help of your loved ones and future caregivers.
Reverse Mortgage Myths & Realities
Many people think they know all about reverse mortgages, but with so much misinformation out there, it can be hard to decipher the myths from the realities. Here are some of the most common misperceptions & the real truths.
Myth #1: You give up owning the home.
Contrary to popular belief, you and your estate continue to retain ownership of your home. The lender’s interest is limited to the outstanding loan balance as a lien on the property. Upon the last remaining borrower permanently leaving the home, the lender gets paid off a sum totaling the amount borrowed plus interest accrued over the life of the loan.
Myth #2: I will leave a debt to my heirs.
Reverse mortgages are non-recourse loans, so when the property is sold and if the sale of the home doesn’t cover the balance of the loan, the borrower or the heirs are not responsible for the difference of the loan. The FHA actually covers the difference.
How much home equity is left when you leave the home depends on how much you borrow, how much interest has accrued over the life of the loan and the value of the home at the time of sale.
It’s important to remember that home equity is only one piece of the pie. While you may leave less home equity to your heirs, it doesn’t necessarily mean that you will leave less of an overall inheritance. Utilizing your home equity tax efficiently with a reverse mortgage, may allow you to better manage retirements risks such as:
- Market Risk
- Sequence of Return Risk
- Long–Term Care Risk
- Taxation Risk
- Regulatory Risk
- Longevity risk
How you navigate these risks will determine the success of your legacy.
Myth #3: There are restrictions on how proceeds can be used.
Proceeds can be used however you see fit. There are no restrictions on what you can do with your money. We recommend careful consideration of all options.
Consult with a tax specialist or financial adviser before making any investments.
Myth #4: The home must be owned free and clear.
Many borrowers actually use the reverse mortgage loan to pay off an existing mortgage and eliminate monthly mortgage payments. Paying off the existing mortgage and any other liens is required as part of the loan.
*It is the borrower’s responsibility to continue to pay for property taxes, homeowner’s insurance and home maintenance.
Myth #5: Reverse mortgages should only be used as a last resort.
The perception that reverse mortgage loans are only for ‘financially strapped’ borrowers is changing. Affluent borrowers with multi-million-dollar homes and healthy retirement assets are using reverse mortgage loans as part of their financial and estate planning, and are working closely with their financial advisers and estate attorneys to secure a better retirement.
Myth #6: Reverse mortgage interest rates are exorbitant.
In fact, reverse mortgage rates are on par with traditional mortgage rates. Interest only accrues on the actual amount borrowed, NOT on the unused portion of funds available.
Borrowers may choose from fixed or variable rate options.
Myth #7: The fees are really expensive.
Closing costs, which include title, recordation, loan origination and state or county fees, are the same as with traditional mortgages. Reverse mortgages are more expensive than traditional loans because they also include reverse mortgage insurance, which provides important protections for borrowers.
There is an up-front mortgage insurance premium (MIP) required on all HECM reverse mortgages. This “MIP” is a flat 2 percent premium based on the maximum lending amount of $970,800 or your home’s appraised value, whichever is less. Ongoing MIP rates are currently 0.5 percent of the outstanding loan balance, accrued annually and paid when the loan is due.
Myth #8: I won't qualify for a reverse mortgage due to my limited income.
While a traditional mortgage requires monthly payments, a reverse mortgage pays you.
Reverse mortgages are based on residual income, which is calculated by adding monthly income and deducting debt payments, utilities and maintenance costs estimated by the home’s geographic region and square footage. Qualified borrowers, especially those on a fixed or limited income, will have a far easier time qualifying for reverse mortgages than traditional mortgage loans.
Myth #9: “I don’t need it now.
I can just wait and get a reverse mortgage when I really need it.”
It’s tougher now to get a reverse mortgage than in years past due to FHA’s tightening of qualifying standards. Even if you meet today’s qualifications, you might not qualify at a later date.
Other factors to consider are as follows:
- Higher interest rates – Current interest rates are at historic lows. It’s likely that rates will go up over time.
- Lower property values – Property values across the country have remained strong during recent years. In the event of a market correction, your home value may decrease; as a result, you may not qualify for as much money or you may not qualify at all.
- Line of credit that grows with you – For borrowers who don’t necessarily need funds now, establishing a standby line of credit which offers a guaranteed rate of growth will enable you to maximize the amount of home equity you can borrow. Starting the line of credit sooner than later will yield a large bucket of money for later in life.
Myth #10: I’ll lose my government benefits.
Reality: Reverse mortgage payouts generally do not affect regular Social Security or Medicare benefits. However, needs-based benefits, such as Supplemental Security Income or Medicaid, may be affected. Consult with a financial professional about your individual situation.
Reverse Mortgage Glossary
Most homeowners are quite familiar with traditional mortgages, but know very little about reverse mortgages. With this in mind, we’ve created the glossary below to help you better understand key reverse mortgage terms from A to Z.
Appraisal
A report that states an opinion on the value of a property based on its characteristics and the selling prices of similar properties in the area.
Counseling
A service provided by an independent third-party, typically approved by the U.S. Department of Housing and Urban Development, to make sure the borrower fully understands the reverse mortgage and reviews alternative options, prior to application.
Mandatory for the HECM program and in certain states for all types of reverse mortgages.
Fixed Rate
An interest rate that remains constant over the life of the loan.
HECM
Home Equity Conversion Mortgage. This is the industry term for Reverse Mortgage.
Initial Principal Limit
Amount of funds you are eligible to receive from a reverse mortgage before closing costs are deducted.
Interest Rate
Expected Interest Rate: The interest rate used to calculate the principal limit. It equals either the 10-year CMT or the 10-year LIBOR rate plus a margin.
Actual Interest Rate
The interest rate first charged on the loan beginning at closing; it equals one of the HUD-approved interest rate indices (1-month CMT, 1-year CMT, or 1-month LIBOR) plus a margin. Also called Initial Interest Rate.
Index
Reverse mortgage interest rates are tied to one of two indexes, the Constant Maturity Treasury rate (CMT) or the London Interbank Offered Rate (LIBOR).
Lifetime Expectancy Set-Aside (LESA)
The LESA life expectancy set aside, helps reverse mortgage borrowers with credit challenges or limited income to stay current with payments for property taxes and insurance.
Setting up a LESA involves carving out a portion of the principal limit (the total pool of funds available) into a set aside account that is preserved solely for the payment of property charges.
The exact amount of the carve out varies widely from borrower to borrower because it is based on age and how much property taxes and insurance cost.
Line of Credit Growth Feature
In some cases, the available line of credit increases over time according to
the terms of the loan agreement.
Loan Closing Date
Date on which your reverse mortgage is scheduled to close.
Margin
An amount added to the Index (CMT or LIBOR) to determine both the Expected and Actual interest rates.
The margin is determined by the loan investor.
Maximum Claim Amount
Used in determining the principal limit.
MIP (Mortgage Insurance Premium)
Under the HECM program, a fee charged to borrowers that is equal to a small percentage of the maximum claim amount, plus an annual premium thereafter on the loan balance. The MIP guarantees that if the lender goes out of business, FHA will step in and ensure the borrower has continued access to his or her loan funds. The MIP further guarantees that when the property is sold to pay back the reverse mortgage, the borrower will never owe more than the value of the home.
Net Principal Limit
Amount of funds you are eligible to receive at closing after loan costs have been deducted.
Non-Recourse Loan
A feature that limits the amount owed by the borrower, heirs or estate when the loan becomes due and payable to the appraised home value.
For the HECM program, non-recourse only applies when the home is sold.
Open End Line of Credit
A line of credit that allows the borrower to withdrawal funds, make payments back to the lender, and then have the ability to make subsequent withdrawals.
Origination Fee
A fee charged by the lender to cover its expenses for originating the loan. A lender can charge the greater of $2,500 or 2 percent of the first $200,000 of your home’s value plus 1% of the amount over $200,000. HECM origination fees are capped at $6,000. Some lenders waive or reduce the origination fees on certain products.
Prepayment Penalty
Paying off a reverse mortgage early (that is, before the borrower permanently vacates the property). Under the HECM program, there is no penalty for paying all, or a portion, of the loan prematurely.
Principal Limit
The total loan proceeds available at closing.
Title Insurance
A type of insurance policy that protects a homeowner or lender against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens. The cost for the policy is typically paid at closing by the borrower.
Variable Rate
An interest rate that adjusts monthly or annually.
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- © 2022 Steven J. Sless NMLS #298581 | Primary Residential Mortgage NMLS #3094 | All Rights Reserved
- PRMI NMLS 3094. PRMI is an Equal Housing Lender. Some products and services may not be available in all states. Credit and collateral are subject to approval. Terms and conditions apply. Programs, rates, terms, and conditions are subject to change and are subject to borrower(s) qualification. This is not a commitment to lend. This ad is not from HUD or FHA and was not approved by HUD or any government agency. The loan is subject to foreclosure for failure to pay taxes and insurance to maintain the property and insurance and to comply with the terms of the loan. Consumers remain responsible for property taxes, homeowner’s insurance, and home maintenance.
- HomeSafe Reverse Mortgage products that allow 55+ age borrowers, are not available in all states. MA, WA, NC, TX and UT have restrictions, to require borrowers to be age 60 to 62 years old, for Reverse Mortgage products. State restrictions and PRMI state licensing overlays apply. Contact us, for more information.
