What Is a Reverse Mortgage?
The most common type of reverse mortgage is a loan insured by the Federal Housing Administration (FHA), which is also called a HECM. It allows you to access your home equity and turn it into cash. Borrowers choose a reverse mortgage because it allows them to remain in their homes, as long as they meet the loan terms, and provides funds that can greatly supplement their retirement income.
How a Reverse Mortgage Loan Works
With a traditional reverse mortgage loan, borrowers can access their home equity without having to pay principal and interest.* It’s called a “reverse mortgage” because, unlike a traditional loan where the borrower makes payments to the lender, the lender makes payments to the borrower. The loan is repaid when the last borrower or eligible non-borrowing spouse passes away or leaves the house.
- The borrower remains the owner of the home and retains title.*
- The amount you can borrow depends on your age, property value, and interest rate. The older you are, the more equity you’ll have access to.
- The borrower must continue to pay property taxes and homeowner’s insurance, and must keep the house in good repair.
- As a non-recourse loan, the borrower will never owe more than the house is worth. If the loan balance exceeds the home’s value, the Federal Housing Administration will cover the difference.
- There are different types of reverse mortgages and the funds can be disbursed in a number of ways.
Who Qualifies for a Reverse Mortgage Loan
Traditional reverse mortgages were established in 1989 to help older homeowners age in place. As a government-insured loan, there are several important requirements borrowers must meet to qualify.
- You must be at least 62 years old.
- You must own your home.
- The home must be your primary residence.
Features and Safeguards
The HECM reverse mortgage product has been improved over the years so that it can better meet the needs of older adults. Today, there are important safeguards in place to ensure that it can continue to help consumers for years to come.
- You must complete reverse mortgage counseling with an independent counseling agency.
- You must undergo a financial assessment to ensure you are able to meet the financial obligations of the loan, which includes the ability to pay your property taxes and homeowners insurance.
- If your spouse is younger than 62, they can qualify as an eligible non-borrowing spouse and remain in the home even if you leave or pass away, so long as they continue to meet all loan obligations.*
The Most Common Way to Repay a Reverse Mortgage
When you first begin to learn about a reverse mortgage and its associated advantages, your initial impression may be that the loan product is “too good to be true.” After all, a key advantage to this loan, designed for homeowners age 62 and older, is that it does not require the borrower to make monthly mortgage payments. Borrowers are responsible for paying property taxes, homeowner’s insurance, and for home maintenance. Though at first this advantage may make it seem as if there is no repayment of the loan at all, the truth is that a reverse mortgage is simply another kind of home equity loan and does eventually get repaid. With that in mind, you may ask yourself: without a monthly mortgage payment, when and how would repayment of a reverse mortgage occur?
Reverse Mortgage Payoff
A reverse mortgage is different from other loan products because repayment is not accomplished through a monthly mortgage payment over time. Instead, it is repaid all at once at loan maturity. Loan maturity typically happens if you sell or transfer the title of your home or permanently leave the home. However, it may also occur if you default on the loan terms. You are considered to have permanently left the home if you do not live in it as your primary residence for more than 12 consecutive months. This can happen if you move into a nursing home or your child’s home, travel for an extended period of time, or pass away.
When any of these instances occur, the reverse mortgage loan becomes due and payable. The most common method of repayment is by selling the home, where proceeds from the sale are then used to repay the reverse mortgage loan in full. Either you or your heirs would typically take responsibility for the transaction and receive any remaining equity in the home after the reverse mortgage loan is repaid.
If the loan balance is larger than the home’s sale price, borrowers who have the federally-insured version of a reverse mortgage, also known as a Home Equity Conversion Mortgage (HECM), are offered additional protections. A HECM reverse mortgage ensures that borrowers are only responsible for the amount their home sells for, even if the loan balance surpasses this amount. The insurance, backed by the Federal Housing Administration (FHA), covers the remaining loan balance.
In instances when heirs prefer to keep the home instead of selling it, they may choose another form of repayment. Common alternatives include refinancing the reverse mortgage loan into a traditional mortgage, or the use of personal savings or funds. Qualifying heirs may also refinance the home into another reverse mortgage.
A reverse mortgage payoff isn’t limited to these options, however. If you would like to make payments on the reverse mortgage during the life of the loan, you certainly may do so without penalty. And, when making monthly mortgage payments, an amortization schedule can prove useful.
Reverse Mortgage Amortization Schedule
A reverse mortgage amortization schedule is a summary of some important information about the loan:
- The numbered years of the loan
- The interest rate
- How the loan interest may accrue over the course of the loan
- How the credit line may grow
- The remaining home equity, by year
- How the loan balance may change as time passes
Some borrowers choose to repay the interest each month to keep the mortgage balance from amortizing negatively. A way to do this is to calculate the interest plus the mortgage insurance for the year, and divide the amount by 12 months. If you choose to do this, you can rest assured that there are no penalties for making loan payments prior to its maturity date. However, many borrowers choose to enjoy the benefits of having no monthly mortgage payments with the understanding that, at loan maturity, proceeds from the sale of the home will be put towards repayment of the loan balance in full. Borrowers are responsible for paying property taxes, homeowner’s insurance, and for home maintenance. For additional questions, speak with your tax advisor about reverse mortgage tax implications and how they may affect you.
Although the reverse mortgage loan is a powerful financial tool that taps into your home equity while deferring repayment for a period of time, your obligations as a homeowner do not end at loan closing. It is important for you to note that continuation of the payments for homeowners insurance, property taxes, and maintenance of the home must still be upheld during the life of the loan in order to remain compliant with terms, as would be expected with any mortgage.
A reverse mortgage is a useful tool for senior homeowners to help fund retirement. And, with a few options for repayment, you can feel confident that you will find a method that works the best for your situation. To learn more about this flexible loan, contact a reverse mortgage professional at American Advisors Group to help you determine your options for repayment and the many ways you can benefit from the loan’s unique features.