As more consumers learn about the versatility of reverse mortgages, this financial planning tool has gained significant popularity. A federally-insured private loan, a Reverse Mortgage offers seniors greater financial security. In fact, many use it to supplement their Social Security, meet unexpected medical expenses, make home improvements, and more. Since your home is probably your largest single investment, it’s smart to know more about reverse mortgages, and decide if one is right for you!
What is a reverse mortgage?
A reverse mortgage is a special type of home loan that lets a homeowner convert a portion of the equity in his/her home into cash. The equity built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence. It’s also federally-insured.
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Can I qualify for a reverse mortgage?
If you answer “yes” to the following three questions, you may be eligible for a reverse mortgage:
1) Are you, and any other current owners of your home, 62 years old or over?
2) Do you live in your home as a principal residence?
3) Is your home a single-family residence or a 1-4 family unit dwelling, a condominium, or part of a planned unit development (PUD)?
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What are the Benefits of a Reverse Mortgage?
- Tax-free funds for as long as you live in your home
- No loan repayment for as long as you live in your home
- No income, medical or credit requirements
- Retain ownership of your home for life; this is guaranteed as long as you maintain your home, and pay insurance and real estate taxes
- Choose a cash flow plan tailored to your needs
- No restrictions on how you may use the funds
- A tax-advantaged way to pass on part of your estate today
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What makes it a “reverse” mortgage?
A reverse mortgage is exactly what its name implies — a loan whose features make it essentially the reverse of a traditional “forward” mortgage. Instead of paying your lender, your lender pays you. Instead of reducing your debt as the loan term progresses, you increase it. Instead of turning your income into equity, you turn your equity into income.
That last feature — the ability to turn your equity into income — is what most distinguishes a reverse mortgage from other loans, and it’s what makes it so valuable to many senior homeowners. Having spent years repaying the mortgage that allowed you to buy your home, you can now tap into that investment to help you achieve your goals later in life. However you plan to use your equity — whether traveling, paying medical expenses, improving your home, or just adding a bit of cushion to your monthly budget — you’ll have a golden opportunity to put your nest egg to good use.
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What types of homes are eligible?
Your home must be a single family dwelling or a two-to-four unit property that you own and occupy. Townhouses, detached homes, units in condominiums and some manufactured homes are eligible. Condominiums must be FHA-approved.
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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. The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA’s mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow. You don’t make payments, because the loan is not due as long as the house is your principal residence. Like all homeowners, you still are required to pay your real estate taxes and other conventional payments like utilities, but with an FHA-insured Reverse Mortgage, you cannot be foreclosed or forced to vacate your house because you “missed your mortgage payment.”
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Can the lender take my home away if I outlive the loan?
No! You do not need to repay the loan as long as you or one of the borrowers continues to live in the house and keeps the taxes and insurance current. You can never owe more than your home’s value.
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Will I still have an estate that I can leave to my heirs?
When you sell your home or no longer use it for your primary residence, you or your estate will repay the cash you received from the reverse mortgage, plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs. None of your other assets will be affected by a reverse mortgage loan. This debt will never be passed along to the estate or heirs.
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How much money can I get from my home?
The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA’s mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow.
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How do I receive my payments?
You have five options:
- Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
- Term - equal monthly payments for a fixed period of months selected
- Line of Credit - unscheduled payments or in installments, at times and in amounts of borrower’s choosing until the line of credit is exhausted.
- Modified Tenure - combination of line of credit with monthly payments for as long as the borrower remains in the home.
- Modified Term - combination of line of credit with monthly payments for a fixed period of months selected by the borrower.
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Is there only one kind of reverse mortgage?
No. In fact, there are six types of reverse mortgages that can affect the cost of the loan, the total amount of the loan, and even how you’re able to spend the money you receive. Your reverse mortgage specialist understands all the rules for each and can help you determine which type would be most beneficial for you.
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I’m interested, but I have more questions. Who can I talk to?
Before getting a reverse mortgage, you will first have the opportunity to meet face to face with an independent reverse mortgage counselor at no cost to you. Your counselor will answer any questions you have, inform you about other alternative options for your unique situation, and help you decide if you even need a reverse mortgage, and if so, which type would be the best fit for you and your needs.
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What are the costs involved?
The only costs to get started include a small, one-time application fee which covers the cost of a professional home appraisal and credit report. The long-term costs of a reverse mortgage are similar to a traditional mortgage, including interest charges, origination fees, closing costs, and insurance. These costs can simply be added to your loan balance.
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My house is not paid off yet. Can I still get a reverse mortgage?
Absolutely - as long as your equity is greater than the amount you still owe. If you currently owe money on your home, your previous lender may agree to be repaid after the reverse mortgage is repaid. Otherwise, you can either pay off the old debt before you get a reverse mortgage, or you can use the initial proceeds from the reverse mortgage to pay the debt.
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If I get a reverse mortgage, does the bank own my house?
Absolutely not. With a reverse mortgage - you still own your home. Of course, that means you must continue to pay your property taxes, make necessary repairs to the home, and keep home-owner’s insurance.
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Will my children be responsible for repayment of the reverse mortgage?
No. A reverse mortgage is what is called a non-recourse loan. This means the bank can never come after any person or estate for repayment of the loan. The bank can only use the value of the home as repayment.
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Are there any restrictions I need to be aware of?
During your loan period, there may be restrictions for:
- Renting out your home
- Adding new owners to the home’s title
- Changing your home’s zoning classification, or
- Taking out new debt against your home
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What if I change my mind?
Relax - even after you close your reverse mortgage, you still a chance to reconsider. Should you decide for any reason that you no longer want the loan, you have three days to cancel.
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Isn’t it selfish to get a reverse mortgage rather than leave my estate to my children?
Some potential reverse mortgage candidates are concerned they will have less home equity to leave their heirs – until they actually speak with their heirs. Many adult children want to see their parents living comfortably and enjoying their retirement rather than struggling just to leave something behind when they die. Besides, a reverse mortgage can actually grant seniors the freedom to help their children and grandchildren with expenses while they are still alive to see them enjoy it. And don’t forget: your heirs will still receive the remaining equity after the loan is repaid.
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Our Breadth of Resources
Every borrower has specific needs and goals. In our commitment to making a difference in communities near and far, World Alliance Financial offers a host of innovative mortgage products suited to every individual requirement. We also offer the latest in financial tools that allow us to decrease loan-processing time, reduce costs, and remain fiercely competitive in the industry. Some of our products include:
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