Features of Reverse Mortgages
Generally, loan advances from a reverse mortgage are non-taxable. Moreover, the title to your home remains in your name. The lender will never own the home, even after the last surviving spouse has permanently left.
Below are more details regardinincreasg how reverse mortgages work.
To be eligible for a reverse mortgage, you will need to be 62 years old and above. Most single-family homes, owner-occupied townhouses, manufactured homes and approved condominiums are eligible for the loan, provided they meet FHA minimum property standards. If there is still an existing mortgage on the home, it can be paid off with funds from the reverse mortgage.
Reverse mortgage comes in different types, but there are fees that are typically common to them.
Most fees for a reverse mortgage can in fact be paid from the reverse mortgage itself. Lenders typically charge an origination fee and closing costs. HECMs also require a mortgage insurance premium.
Your initial out-of-pocket expense will usually be the appraisal fee and counseling charges, if applicable. This would amount to around a few hundred dollars.
Loan Amount and Distribution
How much you can get with a reverse mortgage depends on your age (or the age of the younger spouse), the value of the home, the interest rate, and any initial costs. Generally, the older you are, the more funds you will be eligible for, and the higher the value of the home, the bigger the loan amount will be.
During the first year, you are limited to access only 60% of your total funds. For example, if you qualified for a $80,000 reverse mortgage loan, you can take up to $48,000 immediately. Exceptions apply if your existing mortgage on the home is greater than the 60% limit, in which case you will need to pay off this mandatory obligation before being eligible for a reverse mortgage. To do so, you can withdraw enough to pay this amount plus another 10% of your total funds.
Loan proceeds can be received through the following options:
- Lump sum: a set amount of cash at closing
- Line of credit: withdraw as needed
- Term: monthly payments for a set number of years
- Tenure: monthly payments for the life of the loan
You may also choose to combine any of these options together.
Because you retain the title to your home, it’s still your responsibility to pay for property taxes, insurance, utilities and other expenses. You also need to maintain the home up to FHA standards. Not doing so may result in loan default, which means your reverse mortgage becomes due and payable.
A reverse mortgage loan grows over time. The interest rate is usually variable and is tied to a financial index, but some lenders also offer fixed rates. This interest growth is added to the outstanding balance, along with annual mortgage insurance premiums and servicing fees. Therefore, when the loan finally becomes due and payable, you will have owed more than you initially borrowed.
Loan Payment and Inheritance
Generally, the reverse mortgage should only be the loan made against the value of your home. If you have any existing debt on your home, you must pay it off first. You can use the money you get from the reverse mortgage to settle that.
Meanwhile, a reverse mortgage loan becomes payable and due when the borrower and co-borrower no longer live the home, which can be due to their passing away or simply moving out. At this point, the total loan amount needs to be settled along with the interest.
Your heirs or your estate can either choose to pay the outstanding balance and keep the home, or sell it and repay the loan with the proceeds.
Any excess amount resulting in the sale of the home passes on to your heirs. If the home is sold for less than the loan balance, the estate is not required to pay more than the value of the home.
The “non-recourse” clause in most reverse mortgages (especially HECMs) prevents you from owing more than the appraised value of the home or the sale price.
Frequently Asked Questions about HUD’s Reverse Mortgages, U.S. Department of Housing and Urban Development
Next topic: Reverse Mortgage Fees and Costs