What is a Reverse Mortgage?
The reverse mortgage has a very bad reputation, and in the past, it may have deserved it. But new laws and safeguards have turned the reverse mortgage from a niche product, to a life saver for the right person in retirement.
So What Exactly is a Reverse Mortgage?
A reverse mortgage is a type of home equity loan that allows homeowners to borrow against the equity in their homes. Unlike a traditional home equity loan, a reverse mortgage does not require monthly payments. Instead, the loan is repaid when the borrower dies, sells the property, or moves out of the house.
Reverse mortgages can be a good option for people who are “house rich but cash poor,” meaning they have a lot of equity in their home but not enough income to retire well. They are a great way to tap into your equity and eliminate your mortgage payment, and also have access to the equity at a later time by using the line of credit.
Reverse Mortgages can be a great way for retirees to supplement their income, pay off debt, or pay for home repairs or other expenses. However, there are some things to keep in mind before taking out a Reverse Mortgage.
- First, the loan will need to be repaid with interest when the borrower dies, moves out of the house, or sells the property.
- Second, the borrower will need to continue paying property taxes and insurance.
- And finally, the borrower may need to get homeowner’s insurance if they don’t already have it.
Reverse Mortgages can be a great way to get extra cash in retirement, but it’s important to understand all of the terms and conditions before taking one out.
You don’t have to be an expert in reverse mortgages – that’s my job. I know how to navigate through all of the rules and guidelines, so don’t worry. Schedule an appointment so we can see if the reverse mortgage is a good fit for you!
Reverse Mortgage vs Refinance Home Loan
It may be helpful to compare the reverse mortgage to a regular mortgage refinance loan.
Refinance Home Loan
- Requires monthly payments. When you get a refinance loan, you make monthly payments towards the interest and principal of the loan.
- Because you make monthly payments, the principal of the loan goes down each month and eventually (usually 30 years) you pay off the loan entirely.
- You need to qualify for the loan. With a regular refinance, you need to show that you have the income to pay off the loan each month.
- You still have to pay your property taxes, insurance and HOA (if you have one) or you risk losing your home.
- Has closing costs, and mortgage insurance may be required for higher LTVs.
- No monthly mortgage payment is required. You always have the option to make monthly payments to keep the loan amount low.
- Interest is added to the loan each month, so the loan amount goes up each month. But when you (or your heirs) pay off the loan, you will never owe more than the home is worth. Click Here for More Details.
- Minimal qualification is needed. You just have to show that you have the income to pay your monthly bills (taxes, insurance HOA) and have money to live on.
- You still have to pay your property taxes, insurance and HOA (if you have one) or you risk losing your home.
- Has closing costs, and always requires mortgage insurance.
So you see, just like anything in life, each loan has its pros and cons. The only way you will know for sure is if you speak to a qualified lender that specializes in reverse mortgages.
How Does a Reverse Mortgage Work?
A reverse mortgage is a type of loan that allows homeowners to borrow against the equity in their home. The loan does not have to be repaid until the borrower dies, sells the property, or moves out of the house.
Reverse mortgages can be a helpful way for seniors to supplement their income, and have a line of credit to access their equity for expenses later down the line. All of the money does not need to be taken out all at once.
Before taking out a reverse mortgage, it is important to understand how they work and what the potential risks are. Reverse mortgages are not for everyone, but they can be a good option for seniors who are struggling to make ends meet or want to have access to their equity at a later time.
- No mortgage payments are required. The interest is added to the principal each month.
- You have the option of making monthly payments to keep the loan amount low, and skip payments when you have unexpected expenses.
- The amount you can borrow depends on your age (the older you are, the more you can borrow) and how much equity you have. As a rule of thumb, you can rarely borrow more than 50% of your home value.
- You don’t have to pay back the mortgage until you pass away, sell, or move out.
- If both husband and wife are on the loan, the surviving spouse can stay in the home until one of the triggering events occurs.
- When paying off the mortgage, you will never owe more than the house is worth. Even if you stay in the home until you are 150 years old, and the loan amount is way more than what the home is worth, you (or your heirs) only have to pay off the value of the home, minus closing costs. This is why the mortgage insurance is required, to protect the lender if this happens.
Ways to Access Your Equity with a Reverse Mortgage
There are several different ways to access your equity. You can even combine the different ways.
- Lump Sum. You can take all the money you need all at once, paid at closing. Note: this is the only method that cannot be combined with other methods. If you take the lump sum, you will need to refinance into another reverse mortgage to get more money out.
- Equal Monthly Payments. You can use your reverse mortgage to get a monthly payment to supplement your income. This payment will continue for the rest of your life, even if your loan amount surpasses the value of your home.
- Monthly Payments for a Set Term. You can set up monthly payments to last for a set term, say 60 months. Many seniors use this method as a strategy to supplement their income until they reach 70, so they can get their full social security benefit.
- Line of Credit. You can create a line of credit, so that you can access your equity at a later date. Many homeowners use this method, even if their home is paid off, so that they have easy access to money, for things like surprise medical expenses, paying for college for their grandkids, and to be able to age in place. Also, the line of credit grows each month, so as the value of your home increases each year, so will the amount of equity you’ll be able to access. And even if your home value decreases, the line of credit will continue to grow, thanks to the mortgage insurance.
- Combination of 2, 3 and/or 4. If you want, you can get a line of credit, and a monthly payment. The reverse mortgage is flexible in the ways you can access your equity.
Who Would Benefit From a Reverse Mortgage?
This is a difficult question to answer, because there are so many different ways that one can use a reverse mortgage. But if I were to put the uses into buckets, I would come up with three.
House Rich, Cash Poor. Many Americans have benefited from the appreciation in real estate in the last years, and as a result of that, hold much of their wealth in the equity of their homes.
And on the flip side, many have had a hard time getting ready for retirement. When retirement time comes, they see themselves with not enough monthly income to get by.
By eliminating their mortgage payment with a reverse mortgage, many seniors are finding that they have more money to spend, less stress, and can enjoy their golden years more.
Seniors that don’t need extra monthly income, but want to be able to access the line of credit at a later date. In recent years, the reverse mortgage has become a valuable asset in many retirees’ financial planning toolbox. And many financial advisors are realizing the power of the reverse mortgage in making money last longer in retirement. Here are some ways you can use it for your retirement plan
- Use the money to delay taking social security until age 70 to get your largest monthly benefit.
- Many seniors are opting to age in place. When that time comes, you can use the line of credit to upgrade your home to become more age friendly, AND use it to help pay for the assistance you may need on a daily or weekly basis.
- Pay for any unexpected expenses that may occur in our older years.
Seniors tha want to eliminate high interest rate debt. A reverse mortgage is a great way to get rid of debt and lower monthly payments. Having no monthly payments can free up money to enjoy daily activities, travel more, and visit the grandchildren.
How Do I Qualify for a Reverse Mortgage?
Qualifying for a reverse mortgage is easier than qualifying for a regular mortgage. Here are some guidelines to qualify.
For a HECM (Home Equity Conversion Mortgage), which is the most popular reverse mortgage, the borrowers need to be over the age of 62 years old, or within 6 months of turning 62. If one of the married partners is not yet 62, the younger spouse can be added to the loan as a “non borrowing spouse.” Please talk to a qualified reverse mortgage specialist to get more details on this designation.
For many jumbo reverse mortgages, the borrowers need only be 60 years old.
The amount of money you can take out depends on several factors, but as a general rule, you will need to have at least 50% equity to get a reverse mortgage. This is a safeguard for both the borrowers and the lender, ensuring that there is a nice buffer between the loan amount and the value of the home.
- Single Family Homes
- FHA Approved Condos
- Duplexes (if borrower lives in one of the units)
- Manufactured homes
Homes have to be in good, livable condition and must be maintained throughout the lifetime of the loan.
The borrower(s) must have sufficient income to pay for all expenses, including taxes and insurance, and have enough income to pay for daily expenses.
Income Sources can include Social Security, Military Pension, Private Pensions, Employment, and Asset dissipation.
Borrowers must complete a reverse mortgage counseling course from an approved provider. The course will be a thorough walk-through of the pros and cons of the reverse mortgage.
Are Reverse Mortgages Risky?
As a reverse mortgage specialist, one of my biggest jobs is education. The reverse mortgage has such a bad reputation, that overcoming these misconceptions is a full-time job.
In the past, the reverse mortgage had far less protections than it does now, and in some cases, the reverse mortgage loan officer did a poor job of communicating the responsibilities and expectations that come with a reverse mortgage.
Once in a while, I still see pictures of blue haired old ladies getting dragged out of their home on Christmas eve by the evil reverse mortgage company, or something like that. But if you read the article, most times it was because they didn’t know they still had to pay their taxes and insurance, so the home was foreclosed. That was the fault of the lender, that did not educate the home owner on their responsibilites.
There are many protections that have been put in place to protect the buyer, as well as required counseling to make sure the borrower knows what is expected of them. And it’s been working. Foreclosures on reverse mortgages are at an all time low.
Frequently Asked Questions
No. The borrower retains title to the property. Banks are not in the business of owning homes – that is the last thing they want. They will only take the home in rare situations, like homeowner not paying taxes.
In most cases, the money you take out is not taxed, because you are taking out equity. But I am not a CPA or tax professional, so you should always speak to one before proceeding with a reverse mortgage. Everybody’s situation is different.
You can do almost anything with the money you take out. Common uses:
- Pay off other debt )credit cards, auto loans, student loans, etc)
- Get the home ready to age in place
- Pay for in-home care
- Go on vacation
- Buy a rental property
- Pay for college for grandkids.
- Live a better, more stress free life!
Not impossible, but it may make it harder. Here are some things to consider:
If home values keep appreciating, it may mitigate the rising loan amount. But the longer you live, the less equity you have, and it will be harder for you to leave the home to your children.
But here’s the thing. Whenever this is a concern for seniors, we talk to the kids about it. 90% of the time, the kids would much rather you have a safe, comfortable retirement, and they are ok with not getting the home when you pass. They don’t want you moving in with them!!
You can stay in the home as long as you like. Even if you live to150 years old. The reverse mortgage is designed to eliminate the worry of having to sell your home if you can’t pay the mortgage any more.
The only time the loan comes due is if you don’t live in the home, sell the home, pass away, or don’t pay your taxes and insurance.
As long as the surviving spouse is on the loan, they can stay in the home until they die, sell or move out.
If the surviving spouse is not on the loan, but is designated as a non borrowing spouse, they can stay in the home until they die.
If the surviving spouse is not on the loan, and is not designated as a non borrowing spouse, they must move out within 6 months, or get title to the property and refinance or get a reverse mortgage for themself.
The balance of your loan may exceed the value of your home, but when you (or your heirs) sell the home, they will never have to pay back more than what the home is worth. This is why the reverse mortgage has mortgage insurance, to make sure the seller of the home does not have to pay more than the value of the home.
Payback of a reverse mortgage is triggered by any of the following events:
- All borrowers on the loan pass away
- The homeowners sell the home
- All borrowers on the loan do not live in the home for more than six months.
- Homeowners do not pay taxes, insurance and/or HOA fees
As you can see, the reverse mortgage is a fantastic tool to help seniors make their money last longer in retirement, and help eliminate financial stresses. But retirees’ need to go in with their eyes open, and be aware of the pros and cons of the reverse mortgage. But used correctly, it can help seniors live a long and happy life in their golden years.
I’m Your first Call.
Your first step should always be to talk to a mortgage professional. Schedule a time speak with me today, it doesn’t matter if your’e already under contract, or if you are buying until next year. I need to make sure we get you ready, and that you’re doing the right things today, so when you do make an offer, you are all set. I see too many people that take advice from the internet or non-professionals and mess up their chances to buy.
Talk to Jesse – Mortgage Expert
My name is Jesse Rivera. I’m licensed in the State of California and I live and work in beautiful Long Beach, CA. I can do loans for the whole state of California, but I specialize in SoCal, especially Long Beach, Los Angeles County and Orange county.
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