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The reverse mortgage is becoming increasingly popular.  It’s formal name – The Home Equity Conversion Mortgage (HECM) – is the Federal Housing Administration’s (FHA) Reverse Mortgage Program, which enables eligible homeowners to withdraw equity in their home. It is a safe plan that provides older Americans with greater financial security.  Many seniors use reverse mortgages to supplement Social Security, meet unexpected medical expenses, make home improvements, and more.  Free information about reverse mortgages is available through AARP.  For more information visit the AARP website or call their toll-free number: (800) 209-8085.  Chris Smith is available to answer questions and help determine if a reverse mortgage is an appropriate solution.

Top-10 Reverse Mortgage Facts

1.  What is a reverse mortgage?

A reverse mortgage is a special type of home loan that allows homeowners who are 62 years or older to convert a portion of the equity in their home into cash.  Unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer uses the home as the principal residence.  Reverse mortgages can also be used to purchase a primary residence if there is enough cash on hand to pay the difference between the reverse mortgage proceeds and the sales price (plus closing costs).

2.  How do homeowners qualify for a reverse mortgage?

The FHA requires that a homeowner be 62 years of age or older, own the home outright (or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan).  Also, the home must be the primary residence.  

3.  Can homeowners apply if they didn’t buy their home with FHA mortgage insurance?

Yes.  It doesn't matter if you purchased your home with FHA insurance.  However, all reverse mortgages are FHA-insured.

4.  What types of homes are eligible?

A reverse-mortgage property must be a single family home or a 1-4 unit home with one unit occupied by the borrower.  HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.

5.  What's the difference between a reverse mortgage and a home equity loan?

With a traditional second mortgage (or home equity line of credit), homeowners must have sufficient income (versus debt) to qualify for the loan and make monthly mortgage payments.  On the other hand, a reverse mortgage pays homeowners and is available regardless of income. 
 

Also, payments are not made on reverse mortgages, because the loan is not due as long as the property serves as the principal residence. However, payments of real estate taxes, insurance, and other conventional expenses (such as utilities) must be maintained. With a reverse mortgage, homeowners are protected and cannot be foreclosed upon or forced to vacate their homes.

6.  Can a reverse mortgage lender take property away if a borrower outlives the loan?

No.  Homeowners do not need to repay the loan as long as one of the borrowers continues to live in the home and keeps taxes and insurance payments current.  With a reverse mortgage, a homeowner can never owe more than the value of the home at the time the homeowner (or heirs of the estate) sells the property.

7.  Will there still be an estate to leave to heirs?

When a reverse mortgage property is sold, the homeowner or estate must repay the cash received from reverse mortgage payments (plus interest & fees) to the lender.  Any remaining equity in the home belongs to the homeowner or assigned heirs.

8.  How much money is available to a homeowner through a reverse mortgage?

The amount available depends on the homeowner’s age, current interest rate, and appraised home value (or FHA mortgage limits for the area), whichever is less.  Generally, the more valuable the home, the older the homeowner, and the lower the interest rate – the more that can be borrowed. This useful online calculator from AARP helps determine reverse mortgage borrowing levels.

9.  Should an estate planning service be used to find a reverse mortgage?

FHA does NOT recommend using any service that charges a fee to refer borrowers to FHA lenders. FHA provides free information.  Also, HUD-approved housing agencies are available for free (or at a very low cost) to provide information, counseling, and a free referral to a list of FHA-approved lenders. Search online or call toll-free (800) 569-4287 for the name and location of a HUD-approved agency near you.

10.  How are reverse mortgage payments received?

There are five payment options:

1. Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
2. Term - equal monthly payments for a fixed period of months selected.
3. Line of Credit - unscheduled payments or installments (at times and in amounts of the borrower’s choosing) until the line of credit is completed.
4. Modified Tenure - combination of line of credit with monthly payments for as long as the borrower remains in the home.
5. Modified Term - combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.