Reverse Mortgages

Q. What is a reverse mortgage?
A. It is a loan that enables senior homeowners, age 62 and older, to convert part of their home equity into tax-free* income – without:

• Giving up title to their home.
• Making monthly mortgage payments.

Q. How is a reverse mortgage like a home equity loan? How is it different?
A. Both a reverse mortgage and a home equity loan use the equity you have built up in your home to provide you with readily available cash. With a reverse mortgage there are no monthly mortgage payments for as long as you stay in the home, but a home equity loan requires regular monthly payments of principal and interest. So, if you are already having trouble making ends meet, a home equity line does not make sense, but the reverse mortgage may.

Q. Does my current income or other payments impact my ability to get a reverse mortgage?
A. No, the only factors considered for a reverse mortgage are:

• The youngest borrower must be at least 62 years of age
• There are no income, health or credit qualifications
• The value of your home, determined by an FHA appraiser
• The interest rate at the time of application or closing
• The FHA lending limit for your area
• None of the borrowers may be in bankruptcy

Q. I still owe money on a first or second mortgage. Can I still get a reverse mortgage?
A. Yes, you may be eligible for a reverse mortgage even if you still owe money on a first or second mortgage. The funds you would receive from the reverse mortgage would be used first to pay off any existing mortgage balances you have on the property and then any remaining funds would be available to you.

Q. What are the benefits of a reverse mortgage?
A. There are many, here are some of the most important:

• No monthly mortgage payments
• Freedom and flexibility – Money can be used for whatever you choose:
• Help a child or grandchild with college
• Needed home repairs – new roof, new A/C…
• Pay for in home care so you can remain at home
• Home insurance and/or property taxes
• More money for daily living expenses
• Healthcare expenses
• Pay off other debts
• Provides a “financial security blanket”

Tax-free money – because the money you receive from a reverse mortgage is not considered income, it is tax free* and generally will not affect your Social Security or Medicare benefits.

Stay in your home – a reverse mortgage may provide the extra income you may need for someone to provide extra care so that you can stay at home as long as you desire.

You retain home ownership – you own your home, a reverse mortgage is a non-recourse loan, secured only by the value of the home and none of your other assets are at risk.

Q. How do you determine the amount of cash I am eligible to receive?
A. The amount you can borrow depends on several factors, including the age of the youngest borrower on title, the type of reverse mortgage you choose, the current interest rates, the location of your home and the appraised value of your home and the FHA’s lending limits for your area. As a general rule, the older you are, the more valuable your home and the less you owe on it, the more money you can get.

Q. Is there a choice in how I receive the cash from my reverse mortgage?
A. The following options are available:

• Lump sum distribution.
• Equal monthly payments as long as one of the borrowers lives at the property as their principal residence.
• Equal monthly payments for a fixed number of months.
• Line of credit – this allows you to take funds at the times and in amounts of your choice.
• Both line of credit with monthly payments for as long as the borrower remains in the home.
• An initial lump sum distribution and then the balance as a line of credit.

Q. What kinds of homes are eligible for a reverse mortgage?
A. Only the borrower’s primary residence, that is, where they live for more than 6 months of the year. A second home is not eligible.

Q. What event causes the reverse mortgage to become due?
A. A reverse mortgage becomes due and payable when one or more of the following conditions occurs:

• The last surviving borrower permanently moves out of the home or dies.
• All borrowers permanently move out of the home.
• The last surviving borrower fails to live in the home for 12 consecutive months due to physical or mental illness.
• You fail to remain current on the payment of property taxes and/or property insurance.
• You let the property deteriorate, beyond what is considered reasonable wear and tear, and do not correct the problems.

Q. What has to be paid when the loan comes due?
A. The reverse mortgage principal, accrued interest charges, servicing fees and any closing costs are paid from the sale of the house or from a new forward mortgage that refinances the reverse mortgage.

Q. If I take out a reverse mortgage, will I still have an estate that I can leave to my heirs?
A. When you sell your home or no longer use it for your primary residence, you or your estate must repay the lender for the cash received from the reverse mortgage, plus interest and service fees. Any remaining equity belongs to you or your heirs. It isimportant to remember that you can never owe more than the home’s appraised value when it is sold. None of your other assets will be affected by your reverse mortgage loan, it is a non-recourse loan.

Q. Is it possible for my loan balance to become greater than the value of my home?
A. Yes, however you will never be responsible for repaying more than your house is worth. What’s more, since the reverse mortgage is what is known as a “non-recourse” loan, the lender cannot seek repayment from your income, other assets, your estate or your children. In other words, the house alone is available to pay off the debt.

Q. Can a reverse mortgage lender take my home away if I outlive the loan?
A. No, they cannot. Remember, the loan doesn’t become due until the last borrower no longer lives in the home or you fail to maintain the home properly or keep the insurance and property taxes paid on time.

Q. Can I refinance a reverse mortgage?
A. Yes, Refinancing can make sense if your home increase in value or interest rates drop.

Q. Does the reverse mortgage lender own my home?
A. No, the borrower retains title to the property. The reverse mortgage holder merely has a secured claim to the property in exchange for the loan given to the borrower. Because you still own the home you continue to be responsible for the payment of property taxes, insurances, utilities, and home maintenance, just as you are now.

Q. Are there tax consequences with a reverse mortgage?
A. The proceeds from a reverse mortgage are considered loan advances and not income; the IRS does not count this as taxable income. If you receive SSI, Medicaid, or other public assistance, your reverse mortgage loan advances will be counted as part of your “liquid assets” if they remain in your account past the end of the calendar month in which you have receive the payments. You may want to consult with a tax advisor to make sure how you would be impacted given the program limits for total liquid assets and the timing of your loan proceeds.

Q. Why meet with an unbiased counselor before completing my reverse mortgage application?
A. The federal government requires counseling and it is designed for your protection. The counselor, who is from an independent government-approved housing counseling agency, explains in detail the pros’ and con’s of all your reverse mortgage options. He or she will discuss the costs of a reverse mortgage and the financial implications. The counselor should tell you about any government or nonprofit programs for which you may qualify, and advise you on any proprietary reverse mortgages that may be available in your area. The counselor’s advice does not take the place of your own independent tax advisor.

Q. Are reverse mortgage interest rates fixed or variable?
A. Many reverse mortgages have variable interest rates. They are usually linked to a short term financial index and vary according to the market conditions. However in today’s market place most people choose a fixed rate.

Q. How much cash will I have to come up with to cover origination fees and other closing costs?
A. You can use the money you get from your home’s equity (depending on the final calculations) to pay for the various fees that are part of the loan costs. The costs are added to your loan balance and you will pay them back with interest when the loan becomes due – generally when the last surviving borrower permanently moves out of the home or passes away.

Q. I’ve heard that the closing costs on reverse mortgages are very high.
A. The cost of a loan really has several aspects – the closing costs and how long you hold the loan are the two main factors. For example, if you take out a loan for only a few years, the closing costs will be proportionately higher than if you had a loan for a longer period of time. Overall, the costs are quite similar to those for other government insured mortgages. There is a 2% guaranty fee to FHA, versus 1.5% for a regular mortgage. In addition, there is a reserve for future monthly servicing of the loan. The servicing fee on the Reverse Mortgage covers the monthly costs of processing payments, mortgage insurance premiums (if applicable) and record keeping. This is a flat fee that is added to your loan balance each month.

Q. Are there situations where a reverse mortgage is not a good idea?
A. If you know that you plan to leave or sell your home in the next couple of years, or, If you want to allow a relative to inherit the home and their funds are limited.