What is a reverse mortgage?
A reverse mortgage loan allows you to convert some of the equity you have built into your home into loan proceeds that you can use at your own discretion. Basically, you are tapping into the equity you have spent years building, but as long as you abide by all loan terms, you do not have to pay this loan back until you move out of the home permanently. Of course you are still required to pay taxes, insurance and maintenance. With a typical mortgage, you pay the lender back monthly for your loan, but with a reverse mortgage, the lender pays you.
How Does a Reverse Mortgage Work?
This is a mortgage loan for senior homeowners that uses the borrower’s primary home’s equity as collateral. The loan generally does not have to be repaid until the last surviving borrower permanently moves out of the property or passes away.* At that time, the estate has approximately 6 months to repay the balance of the reverse mortgage or sell the home to pay off the balance. Any remaining equity is either paid to the borrower, or inherited by the estate, whichever the case may be. The borrower or estate is not personally liable if the home sells for less than the balance of the reverse mortgage.
There are some circumstances that will cause the loan to mature and the balance to become due and payable. Borrower is still responsible for paying property taxes, insurance and maintenance. Credit is subject to age, property and some limited debt qualifications. Program rates, fees, terms and conditions are not available in all states and subject to change.
What kind of reverse mortgages are there?
There are three reverse mortgage options:
- Single Purpose Reverse Mortgage
These are offered by some state and local governmental agencies, as well as some non-profit organizaations, but they’re not available everywhere. This is the least expensive option, but they can only be used for one purpose, which the lender specifies.
- Proprietary Reverse Mortgages
This a private loan which is backed by a company. Typically, you may qualify for more funds from your reverse mortgage with this option.
- Home Equity Conversion Mortgages (HECMs)
By far the most popular loan, these are federally insured by the Federal Housing Authority (FHA), which can be used for any purpose. Learn more about this loan in the FAQ below “What is a HECM?“
What is a HECM?
HECM stands for Home Equity Conversion Mortgage which is federally insured by the Federal Housing Authority (FHA). While this option can cost more upfront, there are also many advantages to this type of loan. More often than not, the more equity you have in your home, the more you can get from a HECM. There are many factors that determine how much you can borrow such as your age; the type of HECM loan selected; appraised value of your home; current interest rates; a financial assessment of your willingness and ability to pay property taxes and homeowners insurance.
Before you apply for a HECM, you will meet with a counselor from an independent HUD-approved housing counseling agency. The counselor will review the loan’s total cost and what that will mean to your overall financial picture as well as other options that are available to you. The fee for this session can be paid from the loan’s proceeds.
Why is there a negative idea of how reverse mortgages work?
Over the years, regulations for reverse mortgages, and HECMs in particular, have become clearer so that there are more protections for borrowers and lenders alike. For example, a borrower must show he or she must have enough income to pay for taxes, insurance and maintain the home, which is a requirement in order to stay compliant with the loan terms.
Our job to give you the best education available with the most up-to-date facts so you can make a clear and unemotional decision. Fairway Reverse Mortgage Specialists are very experienced and well trained in a variety of senior, real estate and retirement issues so you can feel much more secure about making a decision with one of your most valuable assets—your home.
Will I be eligible for a reverse mortgage?
If you are over the age of 62 and own a home free and clear, you may qualify for a reverse mortgage loan. Keep in mind, however, that credit is also subject to property and some limited debt qualifications. If there is an existing mortgage balance, it must be paid off completely with the proceeds of the reverse mortgage loan at closing. Program rates, fees, terms and conditions are not available in all states and subject to change.
Will I need good credit to qualify for a reverse mortgage?
Generally, there are no credit score requirements for a reverse mortgage, but there are limited debt qualifications.
Will my home will be taken away after I pass away and the family loses the rights to the property?
The money you receive is required to be paid back when you permanently move out of the house with the interest agreed upon in the beginning. The loan will be paid back by equity in the house which may increase over time. If it does not, the reverse mortgage is insured by the Federal Housing Administration (FHA), and they will be responsible for the portion of the pay-off that exceeds the value of the house when the loan is repaid. You will not owe more than the value of your home, as long as you abide by the loan terms. If your heirs want to purchase the home they can by paying 95% of the appraised value or paying off the balance on the loan, whichever is less. Your heirs are still entitled to the remaining equity balance, if any, after the loan has been paid off.
Isn’t it better to own my home without a mortgage?
A reverse mortgage can unlock equity to allow you to properly manage funds for the benefit of you or your family. For example, should you need to have some assisted living at some point, you would have easy access to funds to allow for that.
Are Reverse Mortgages only for people with financial trouble?
There are many people who use a reverse mortgage as part of their financial plan to better their lives today and their children in the future.
Can my children be stuck with a big mortgage debt if I live too long?
Your children can never be liable for any amount over the value of the home because the loan is guaranteed by the Federal Housing Administration Mortgage Insurance Fund.
Most reverse mortgages have something called a “non-recourse” clause. This means that as long as all loan terms have been complied with, you or your estate, will not owe more than the value of your home when the loan becomes due and the home is sold. With a HECM, generally, if you or your heirs want to pay off the loan and keep the home rather than sell it, you would not have to pay more than the appraised value of the home.
Can I lose my home and be forced to move out?
Through the Federal Housing Administration’s HECM program, the monthly mortgage insurance you pay means that you can stay in your home for as long as you live as long as you maintain the home and pay taxes and insurance, as well as abiding with all other loan terms.
Are Reverse Mortgages expensive?
There have been major changes in FHA’s HECM program in the last few years that
reduced costs. While they are more expensive than a traditional mortgage, they have benefits unlike forward mortgages, such as no monthly payments (although payment of taxes, insurance and maintenance are still required); loan proceeds are usually tax free*; and, depending on what type of HECM you choose, a rising credit line.
*This advertisement is not tax advice; you should consult a tax advisor for your specific situation.
What fees are there?
Fairway has an origination fee and other closing costs, as well as servicing fees over the life of the mortgage. However, Reverse Mortgages from Fairway do not contain a servicing fee. Some also charge mortgage insurance premiums (for federally-insured HECMs); there is an upfront mortgage premium, as well as monthly mortgage insurance premium. In addition, you can expect to pay for an appraisal, and real estate closing costs.
Will my rate stay the same?
Interest rates may change over time. Most reverse mortgages have variable rates, which are tied to a financial index and change with the market. Variable rate loans tend to give you more options on how you get your money through the reverse mortgage. Some reverse mortgages – mostly HECMs – offer fixed rates, but they tend to require you to take your loan as a lump sum at closing. The total amount you can borrow is less than you would get with a variable rate loan.
Is my mortgage interest still tax deductible?*
Interest on reverse mortgages is not deductible on income tax returns – until the loan is paid off, either partially or in full.* Although, while a borrower never needs to pay the annual interest, if they choose to do so, the amount they pay will increase their line of equity and they will receive a 1098 to use for a tax deduction in the year they pay the interest.
*This advertisement is not tax advice; you should consult a tax advisor for your specific situation.
Will I be giving up the deed to my home and be unable to make decisions for it?
The deed always stays in your name and you have all the rights that you do now, as long as you comply with all terms of the loan. You can sell it, remodel it and keep any equity that is left when you move.
You are still responsible for maintaining your home. This means you are responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. And, if you don’t pay your property taxes, keep homeowners insurance, or maintain your home, the lender might require you to repay your loan. A financial assessment is required when you apply for the mortgage. As a result, Fairway may require a “set-aside” amount to pay your taxes and insurance during the loan. The “set-aside” reduces the amount of funds you can get in payments.
Does the house need to be debt-free to qualify for a reverse mortgage?
No, but if you do have an existing mortgage, you should have a significant amount of equity in your primary residence. In addition, you must first use the reverse mortgage to pay off the current mortgage.
How do I receive the money once the loan is closed?
There are several ways to receive the proceeds from your reverse mortgage:
- You can take the lump sum in cash at closing.
- You can elect for term payments for a certain number of years.
- You can receive equal monthly payments while you live in the home.
- You can draw upon your line of credit.
- You can combine your options above to make this mortgage work best for you.
What if I change my mind?
If you are refinancing your home, you have three calendar days to change your mind about receiving a reverse mortgage which is known as a “Three Day Right of Rescission.” During that window, you may cancel your loan and we can review that option with you. (NOTE: This 3-day window is not available in a purchase situation; only with refinances.)