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Definition: A reverse mortgage enables homeowners age 62 and over to convert the equity in their home into cash without selling their home or incurring a monthly loan payment. The funds are tax-free, no repayment is required until the homeowner permanently leaves the home, and the borrower retains title to the property.
Qualifications: To quality for a reverse mortgage, you must meet the following requirements:
- Be at least 62 years of age.
- Live in the home.
Non-Recourse: The house stands alone. You are not a personal guarantor nor are you ever required to pay or repay more than the value of the home at the time it is sold, even if the loan balance exceeds the selling price of the home. In addition, no debt is passed to the estate.
Determination of Loan Amount: The amount you can borrow is based on these factors:
- The value of the home
- The age of the homeowner(s)
- The current interest rate
- The maximum allowable lending limit under the chosen program. The maximum allowable lending limit varies depending on the reverse mortgage program selected and the market in which the property is located.
Counseling: For consumer protection, all borrowers are required to obtain counseling from an independent third-party Department of Housing and Urban Development (HUD) approved counseling agency. Counseling is provided in person or over the telephone.
Payment Plans: Reverse mortgage borrowers can choose from several payment plan options:
- Tenure: Borrowers receive an equal monthly check for as long as they live in the home.
- Line of Credit: Borrowers can draw up to the maximum available amount at any time and in any amount. The unused portion of the line of credit available balance increases based on the annual growth rate.
- Lump Sum Cash Advance: A lump sum of cash is distributed to the borrowers at closing.
- Term: Borrowers receive a fixed amount of cash each month for a specified term. When the defined term is up, the payments will stop; however, the loan is not due until the borrowers cease to occupy the home as their primary residence. The term option may provide a higher monthly payment than the tenure option.
- Modified: Borrowers may opt to receive funds in a combination of the above options (e.g., one-half amount in a lump sum, one-quarter in a line of credit, and one-quarter in a monthly check).
Processing Time: On average, it requires 3-4 weeks to process and close a reverse mortgage. Special circumstances may require more time. A rapid response feature is available to assist seniors currently in foreclosure.
Interest Rate: The interest rates vary depending on the reverse mortgage program selected by the borrower. All programs offer adjustable rates, with lifetime caps on the maximum allowable rate. Fixed-rate options are also available.
Closing Costs: Closing costs are financed into the loan and include charges for appraisal, title insurance, origination fee, attorney’s closing fee, FHA Insurance, and recording fees.
Impact on Income Taxes and Social Security: Proceeds from a reverse mortgage are by definition, funds from a mortgage loan and are not considered income. Therefore, these funds do not affect Medicare or Social Security benefits. Borrowers receiving Medicaid or SSI may not be affected if the funds from the reverse mortgage are spent in the month they are received and all other government requirements/ restrictions are met. As always, we recommend that our clients consult with appropriate government agencies for further advice when they are receiving Medicaid or SSI benefits.
Repayment: The reverse mortgage becomes due and payable at the time the last borrower permanently leaves the home. It can be repaid either from the proceeds of the sale of the property or other liquid assets, or the heirs can obtain a conventional mortgage to pay off the reverse mortgage. The loan balance consists of the financed closing costs, the cash that was advanced to the borrower, and any interest and servicing fees that accrued. Remaining equity belongs to the borrowers or their heirs. |
