The Ins and Outs of Reverse Mortgages

Joe and Nancy are enjoying retirement but would like to reduce their expenses so they can wait a few years before accessing their Social Security benefits.

Grant is worried that he will not be able to afford the increasing medical bills for his wife Ann’s deteriorating health. 

Lucy wants to stay in her home as long as she can, even if her health or mobility changes.

Tim and Kate want to upgrade their home and take a long trip when they retire. 

What do all of these people have in common? They all can achieve their goals by applying for a reverse mortgage. Want to know how? Read on!

When you hear the term “reverse mortgage” what do you think? For many people, their first thought is not positive. The misconception that a reverse mortgage is a scam targeting elderly people is very pervasive. But it is not at all true. Just like anything else, a reverse mortgage will not benefit every person. But as long as you follow the rules and work with a reputable mortgage lender, a reverse mortgage can be a lifesaver. It can keep you in your home when everyone is telling you to sell and move. 

Put simply, it gives you more options; not less.  

What is a reverse mortgage?

In a reverse mortgage, you receive a loan for your home where the lender pays you a portion of your home’s equity. It is a tax-free advance payment on your home equity. The money does not have to be paid back until you move out of your home. Most often the payment would come from the proceeds of selling your home. 

The goal of a reverse mortgage is that there is enough value left in the property to cover the principal, the interest, and any fees that have accrued. The best-case scenario occurs when you or your heirs sell the home, pay off the loan, and walk away with some extra cash.  

There are three options in reverse mortgages. Single-purpose reverse mortgages are the least expensive option. These loans may be used for only one purpose, designated by the lender. For example, the lender might say the loan may be used only to pay for home repairs, improvements, or property taxes. These loans are usually best for lower-income Americans. 

Proprietary reverse mortgages are private loans backed by a mortgage company. Homeowners with very expensive homes may receive a larger loan with this type of reverse mortgage.

Home Equity Conversion Mortgages (HECM) are federal loans backed by the Department of Housing and Urban Development (HUD). You can use the proceeds from a HECM loan for just about any purpose. HECM loans are usually more costly than traditional home loans. 

Who can receive a reverse mortgage?

To qualify for a reverse mortgage, you must: 

• be 62 years of age or older, or with a spouse at least 62
• complete a HUD-approved counseling session
• possess a satisfactory credit and payment history (this is NOT your credit score)
• live in the home as your primary residence 
• have at least 50% equity in your home
• earn enough income to maintain the home, pay for ongoing property taxes and homeowners insurance premiums, HOA dues (if applicable) 
• not be delinquent on any other federal loans like student debt or taxes

IMPORTANT: You must still pay property taxes, insurance, and HOA dues with a reverse mortgage. You must also maintain your property according to FHA rules. 

Why would you want a reverse mortgage?

Let’s go back to our stories at the beginning of this article. With a reverse mortgage, Joe and Nancy can pay off the original mortgage on their home and increase their monthly income by not having a mortgage payment to pay. 

A traditional mortgage requires monthly payments; a reverse mortgage does not. Rather, it leverages the equity–which in Colorado, is typically growing each month.i 

Grant can use the loan to pay Ann’s medical bills, pay for in-home care, or pay for a long-term care facility for Ann. 

Lucy can use the money to update her home so she would be safe to age in place and/or pay for in-home care when she needs it. 

Tim and Kate can set up a line of credit to use for updating their home and to take their trip. 

A reverse mortgage can be paid to you in a line of credit, a lump sum, a regular monthly payment (this is called a tenure), a sporadic payment when needed, or a combination. Depending on the lender, recipients of a loan could use the funds for almost anything. 

How much does a reverse mortgage cost? 

Shop around for the best fees. They can vary from lender to lender. These costs may include origination fees, interest fees, closing costs, and servicing fees.

According to our research, reverse mortgage fees MAY include:

• Loan origination fee.
• Upfront mortgage insurance premium, typically 2% of your home’s value for FHFA loan
• Annual mortgage insurance premium, 0.5% of your home’s value 
• Reverse mortgage counseling fee, $125 or more
• Home appraisal and title search fee, among other closing costs

The upfront cost should be considered an investment like any other investment–will it pay off for you in the years to come. For many people, the answer is clearly yes. 

How can I find out how much money I can get?

Your loan amount is calculated based on your age, the current loan interest rate, and the appraised value of your home. There are online reverse mortgage calculators to find a quick estimate of the amount you might receive. You would need to input these details: 

• Your age
• The kind of property you own(single-family, townhome, condo or multi-family or manufactured home)
• Your home’s value
• Your current mortgage balance (if any)
• Whether the home is your primary residence
• Your ZIP code

These calculators are just estimates. If you use them, expect to get loan solicitations. For a more precise answer, call a local reverse mortgage loan professional for a complete quote. This quote should include possible loan terms and time frames. 

What if my home loses value and ends up being worth less than the value of the loan?

You will never owe more than your home is worth at the time of the sale. Your FHA mortgage insurance will cover the difference. This is true for you or your heirs. our lender cannot take any of your other assets as payment. 

What are the pros and cons of a reverse mortgage?

As with any financial opportunity (or any opportunity, for that matter), there are good reasons to apply for a reverse mortgage, and there are not-as-good reasons. Most of them will depend on your unique situation and goals. Here are some of the pros and cons of a reverse mortgage. 

Pros

• You don’t need to make monthly payments toward the loan balance.
• You can use the loan to pay for living and healthcare expenses, monthly living expenses, home upgrades, or debt repayment.
• You decide how you want to receive the money.
• Your spouse can remain in your home after you die.

Cons

• You must maintain your house and continue to pay your property taxes and homeowners insurance–which you would have to do without the reverse mortgage
• You are borrowing against the equity in your home, which is typically a key source of retirement funds.
• Fees and other closing costs will reduce the amount of cash you may receive.
• The negative conceptions of a reverse mortgage may cause disagreement and concern among family members.
• Your heirs may not be able to keep your house. Unless they have access to other funds to pay off the mortgage,  they will probably need to sell the house to pay the reverse mortgage amount due.
• Moving to a long-term care facility or assisted living for 12 consecutive months counts as a change to your permanent residence status. This means your loan will be due after that time. 

Tips for exploring the reverse mortgage potential for you. 

As you can see, there is a lot to consider if you are thinking about taking out a reverse mortgage. Here are some best practices we recommend as you deliberate. 

• Do your research. Find resources like AgeWise Colorado to read up on reverse mortgages and to look for local reputable mortgage brokers. We recommend Orion Mortgage. 
• Ask for recommendations for local brokers. AgeWise Colorado will provide more in the near future.  
• Ask your financial planner to weigh in on your ability to take out a reverse mortgage successfully. 
• Include your family in the research and decision-making process so they feel comfortable with the plan. This can often be the most important thing you can do–but only after you have all the facts available. 

Reverse mortgages are not scams. They are legitimate financial loans created to help older Americans stay in their homes longer. Your retirement years are supposed to be “golden”. Many seniors are mining for that gold in their homes. The equity that you’ve earned over years of mortgage payments can fund your golden years so you can enjoy them.