Reverse Mortgage Overview
Initially designed to help seniors remain in their homes after the loss of income through the death of a spouse, the reverse mortgage has undergone many changes since it’s inception in 1961. In 1988, the FHA federally-insured Home Equity Conversion Mortgage was created. This unique loan product presents a tremendous financial opportunity for seniors in specific circumstances.
Why Reverse Mortgage?
A reverse mortgage is not for everyone. In fact, there are certain financial situations where other options may be more beneficial. However, a Home Equity Conversion Mortgage, or Reverse Mortgage can assist many seniors by providing a monthly revenue stream, lump sum payment, or line of credit.
Reasons to consider a Home Equity Conversion Mortgage:
- A reverse mortgage may be beneficial for an individual who has enough income to live on and pay real estate taxes and insurances, but cannot afford to make monthly payments for supplemental long-term care insurance.
- A reverse mortgage may also aid seniors who need extra cash to pay off an existing mortgage, allowing home equity to supply the funds for home ownership.
- Persons who have ongoing medical expenses or home repairs may wish to explore line of credit options through a reverse mortgage.
- A reverse mortgage can also provide a lump sum to purchase an auto or other real estate property, or to pay off existing debt.
Interest Rates and FHA
Though reverse mortgage recipients borrow money against their own home equity, they still must pay interest on the money they receive. Generally, both fixed-rate and adjustable rate loans are available to homeowners. While a fixed interest rate will not change as it is applied to the loan, an adjustable-rate HECM will vary either monthly, or annually, based on specific terms and current market rates.
The Federal Housing Administration backs many reverse mortgage loans available in the lending marketplace. In essence, the government agency provides insurance that protects the lender’s interest should the borrower default. Many FHA loans offer low down payments and mortgage insurance that can be rolled into the loan itself. This additional insurance cost will be eliminated once the loan matures five years, or reaches 78% of the property value, (whichever situation occurs last).
Repayment of the HECM
The reverse mortgage becomes due and payable under the following circumstances:
- When the last borrower, (or spouse not on the original loan contract) dies, sells the property, or no longer occupies the home for more than 12 months.
- If the homeowner fails to pay mandatory real estate taxes, homeowner’s insurance or HOA fees.
- If the homeowner does not maintain the condition of the property adequately.
- If the homeowner at any time transfers the property title to another non-borrower that is not a HUD approved trustee.
How Repayment is Made
When the reverse mortgage becomes due, borrowers, or heirs to the property can pay back the loan balance a number of ways.
- In order to either retain, or remain in the home, borrowers, or (spouses not party to the HECM contract) or their heirs, must pay off or refinance the existing loan balance. Some homeowners may choose to use proceeds from life insurance benefits for this purpose.
- Individuals may sell the home to settle the loan balance and keep any equity that remains.
- The lender may sell the home, satisfy the loan balance and distribute any remaining equity to borrowers or their heirs.
It is important to note that the HECM loan is considered a “non-recourse” loan. Because of this, only the home itself may be used to repay the loan balance. In the event that there is not enough value in the home to satisfy the reverse mortgage lien, FHA insurance will be used to cover the shortage.
Understanding the many features of a reverse mortgage loan is key to exploring long-term financial options for seniors.