Benefits of A Reverse Mortgage
As you get older, your financial needs can often evolve or simply change due to several factors, such as changes in health or income. A reverse mortgage allows homeowners over 55 to tap into a portion of the equity they have built up in their home for a variety of reasons or purposes. It can be an excellent financial strategy to improve your financial security, to enhance your current and future lifestyle, or a number of other uses and benefits.
What Are the Primary Benefits of a Reverse Mortgage?
There are many benefits to utilizing a reverse mortgage. One of the primary benefits is the ability to use a portion of your home’s equity to receive money that you can use to meet some of your current or anticipated financial needs in retirement. With the HECM, the money you receive can be accessed in several ways, including a lump sum distribution, a line of credit, or a series of monthly payments - referred to as tenure payments - that can be disbursed over a specified set term (for example, the next ten years), or for as long as you remain in the home as your primary residence. The shorter the term, the more money is available monthly.
Another great feature of the HECM is that these three options can be combined, or switched around throughout the term of the loan, depending on your wants and needs.
BONUS: The money received from a reverse mortgage is tax-free and does not affect social security or Medicare benefits (*you will always want to double check with your financial advisor or these agencies to ensure the latter).
Another benefit of a reverse mortgage is that you do not have to repay the loan for as long as you remain in the home and using it as your primary residence. Some owners have a secondary residence - such as a 'winter home' that they stay at for 4-5 months out of the year, while still using their reverse mortgage home as their primary residence, and this is perfectly fine to do. This is true for any of the borrowers on the loan. Thus, if one spouse does sadly pass away or has to move out of the home for health purposes, the remaining spouse may continue to remain in the home with no required mortgage payments. The loan only becomes due when the last remaining borrower is no longer able to occupy the home as his or her primary residence due to a life event. This could be because the home is sold, you had to move out permanently for health reasons (over one year) or moving in with family, or the last remaining borrower passes away. However, as long as you meet the terms of the loan, you can stay in your home, retain full ownership, and enjoy the benefits of the reverse mortgage.
How Does a Reverse Mortgage Work?
In the forward, conventional loan world, the homeowner takes out a mortgage and pays back the loan through monthly installment payments, typically over a 30 or 15-year term, covering the principal and interest.
With a reverse mortgage, the monthly principal and interest payments can be deferred until a life event occurs, such as selling the home or the borrowers passing away. The borrower can elect to make a monthly payment, if desired, however these payments are strictly voluntary. These are high-equity loans that are insured, thus providing protection to the lender as well as the owner, with several safeguards placed on the loans to enhance this protection and security.
The loan works by allowing homeowners to convert a portion of the equity they have built up in their home into useable cash, a monthly tenure payment, or a line of credit with guaranteed growth. The amount of the loan amount one qualifies for is dependent primarily on four factors: the age of the youngest occupying or qualifying owner, the current value of the home and the amount of equity you have, and current interest rates.
When you take out a reverse mortgage, you are borrowing against a percentage of the home’s available equity as outlined by the previously mentioned criteria. Instead of making monthly out of pocket payments to a lender for repayment of the loan, as you normally would do with a forward, conventional loan, the lender extends money to you while agreeing to allow the deferment of the payments from you. The money you receive can come in the form of a lump sum disbursement, a line of credit, or a monthly tenure payment, or, depending on the amount of available equity, a combination of these three. It may also be used to pay off the current mortgage or mortgages against the property, if any exist. If you choose to defer the payments, the loan balance will increase over time as interest and payments accrue. However, even in the event of a worst-case scenario, you can never be obligated to the lender for more than the home's current value.
The loan becomes due when you no longer live in your home, either due to selling it or moving out permanently, you pass away, if you failed to keep up with your property tax, insurance, and HOA obligations, or if you allow the home to fall into disrepair.
Should you pass away and deed the home to your heirs, they will have up to a year to either refinance or sell the home – or, if desired, they can simply deed the home over to the lender, with no negative implications. A reverse mortgage is a non-recourse loan, meaning that the lender can never hold you – or your heirs – personally liable on the loan. In the event of a worst-case scenario, the mortgage insurance will cover any shortage of the loan balance payoff, should one occur.
How Much Money Can I Get from A Reverse Mortgage?
The amount of money you can receive from a reverse mortgage depends on several factors, including the age of the youngest occupying or eligible borrower, the current value of your home, the current interest rate, and the amount of equity you have in the home. Thus, the older you are and the more equity you have in your home, the more money is available to you.
Typically, the maximum amount you can receive from a HECM reverse mortgage is 60% of the available qualifying loan amount during the first year (referred to as the principal limit), with the remainder of the balance available after the start of the second year. For example, if your approved principal limit amount is $100,000, $60,000 would be available to you during the first 12 months, with the remaining $40,000 made available at the start of month 13. Also, the HECM loan has a maximum value limit of $1,089,300 (as of 2023) and the loan amount you qualify for will use this as a maximum value, even of the appraised value is higher. For example, on a HECM, if your home is worth $2,000,000, and the age and rate qualify you to receive 45% of the maximum allowed value, the principal limit you would be eligible to receive would be $490,185, which is 45% of $1,089,300, of which $294,110 (60%) would be made available in the first year, and the remaining $196,074 available beginning in year 2.
However, if home values are higher, the proprietary reverse mortgage could be a better fit for you, as it allows a maximum home value of $10,000,000, and a maximum loan amount of $4,000,000.
Are There Any Fees Associated with Getting a Reverse Mortgage?
I would love to say “no”, but the reality is that there are fees associated with every type of loan, and this includes a reverse mortgage. These include the typical, standard, transaction fees such as loan origination fees, appraisal fees, along with escrow, title, and recording fees. Depending on the type of reverse mortgage loan you get (HECM or proprietary), there could also be a Mortgage Insurance fee – both up-front and monthly – that are typically associated with all FHA-insured loans.
There is one fee, however, that is strictly a reverse mortgage-related fee, and that is the counseling fee. All reverse mortgages require up-from counseling from a HUD-approved counselor*. A list of qualified counselors – both national and local – will be provided to you by the lender when you are presented with an initial proposal to review.
*It is important to note that these counselors are not affiliated with any lender, and, in fact, the loan officer cannot even recommend one over another. The sole responsibility of the counselor is to be an advocate for you and to ensure that you understand this type of loan, helping you to feel comfortable enough if moving forward.
There is a fee associated with the counseling session that you will pay directly to that counselor at the time service is scheduled or performed. Fees can vary depending on the counselor and you have the ability to call several – or all – the names on the list provided to you to check out fees. You can also seek out HUD-approved counselors not on the provided list, if desired. Typically, the fee will run from $125 - $175, and the certificate issued is good for 6 months. This fee, along with the appraisal, will be the only out-of-pocket cost you can expect to pay, other than the appraisal fee, assuming you have enough equity to cover the remaining closing costs.