WHAT IS A REVERSE MORTGAGE?
A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration (FHA) insured loan which enables you to access a portion of your home’s equity to obtain tax-free funds without having to make monthly mortgage payments. If you are 62 years of age or older and have sufficient home equity, you may be able to get the cash you need to:
- Continue to live in your home and maintain the title
- Pay off medical bills, vehicle loans or other debts
- Improve your monthly cash flow
- Fund necessary home repairs or renovations
- Build a “safety net” for unplanned expenses
For a reverse mortgage, you must still live in the home as your primary residence and continue to pay required property taxes, and homeowners’ insurance, while maintaining the home according to FHA requirements. Your current mortgage, if any, must be paid off using the proceeds from your HECM loan. Consult your financial advisor and appropriate government agencies for any effect on your taxes or government benefits.
ELIGIBILITY FOR A REVERSE MORTGAGE
To be eligible for a reverse mortgage, the Federal Housing Administration (FHA) requires that at least one homeowner on the title be at least 62 years old.
A reverse mortgage cannot be outlived. If at least one homeowner lives in the home as their primary residence and maintains the home in accordance with FHA requirements and keeps taxes and insurance current, the loan is not due.
In the event of death, or if the home ceases to be the primary residence for more than 12 months, the homeowner’s estate can choose to repay the reverse mortgage or put the home up for sale. If the equity in the home is higher than the balance of the loan, the remaining equity belongs to the estate. If the sale of the home is not enough to pay off the reverse mortgage, the lender must take a loss and request reimbursement from the FHA. You will not have to pay the difference. No other assets are affected by a reverse mortgage. For example, investments, second homes, and other valuable possessions cannot be taken from the estate to pay off the reverse mortgage.
HOW MUCH DO I QUALIFY FOR WITH A REVERSE MORTGAGE?
The amount that is available generally depends on four factors: age, current interest rate, appraised value of the home, and government-imposed lending limits.
DISTRIBUTION OF PROCEEDS FROM A REVERSE MORTGAGE
There are several ways to receive the proceeds from a reverse mortgage:
- Lump sum: A lump sum of cash at closing
- Tenure: Equal monthly payments as long as the homeowner lives in the home
- Term: Equal monthly payments for a fixed number of years
- Line of Credit: Draw any amount at any time until the line of credit is exhausted
- Any combination of those listed above
FEATURES OF REVERSE MORTGAGESYou always retain title or ownership of your home. The lender never, at any point, owns the home even after the last surviving spouse permanently vacates the property.
Fees can be paid out of the loan proceeds. This means there are minimal personal expenses to get a reverse mortgage, which include the appraisal fee and possibly a charge for counseling that depends on the counseling organization you are working with. Low-income homeowners may be eligible for exemption from the counseling fee.
With a government-insured reverse mortgage, you never have to pay more than the appraised value of the home or the sale price regardless of how large the loan balance may be. The government pays for any excess balance with proceeds from its insurance fund, which the borrower pays into on a monthly basis.
CAN I QUALIFY FOR FHA’S HECM REVERSE MORTGAGE?
The FHA requires that at least one homeowner be 62 years of age or older, have equity in the home, and lives in the home.
DO I REMAIN ON THE TITLE OF MY HOME?
You absolutely remain on title of your home. The title is NEVER negotiable.
WHAT’S THE DIFFERENCE BETWEEN A REVERSE MORTGAGE AND A BANK HOME EQUITY LOAN?
With a traditional second mortgage or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan and you are required to make monthly mortgage payments. The reverse mortgage is different in that it pays you and is available regardless of your current income or credit qualifications. The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home, and/or FHA’s mortgage limits.
With a HECM, there are no monthly mortgage payments. Instead, the lender pays you according to the payment plan you select. Like all homeowners, you are still required to pay your real estate taxes, insurance, and other payments such as utilities.
WHEN DOES MY LOAN BECOME DUE AND PAYABLE?
An HECM loan must be paid in full if the homeowner passes or sells the home. The loan must also be paid in its entirety if:
- You do not pay property taxes or hazard insurance or violate other obligations
- You permanently move to a new principal residence
- You or the last borrower fail to live in the home for 12-months in a row. An example of this situation would be if you (or the last borrower) were to have a 12-month or longer stay in a nursing home
- You allow the property to deteriorate and do not make the necessary repairs
To learn more about reverse mortgages, contact Kevin Kalyan at (516) 851-7967 or with the contact form below, we look forward to hearing from you!