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The HECM or Reverse mortgage product has undergone many favorable changes in the last few years. These changes have made the product safer for the average senior. Reading these frequently asked questions will help answer most of your reverse mortgage questions.
What is a reverse mortgage or home equity conversion mortgage?
In short, it is a loan that allows seniors (age 62+) to access their primary home’s equity.
When do I pay back the loan?
The loan is paid back when the home is sold or vacated for 12 consecutive months by all parties.
Who owns the home?
You own the home, not the bank. Only you are on title. The bank can never remove you from your home as long as you continue to pay your real estate taxes and homeowners insurance. Naturally, if you have HOA dues or other dues associated with your home/neighborhood you’re expected to continue those as well.
When can I sell my home?
Any time you wish. There are no prepayment penalties or special fees. This loan works like any other loan, the lender is paid what is owed, the difference less normal closing costs are paid to you or your heirs. If there is a shortfall in funds, the FHA mortgage insurance covers this.
What if I owe more on my home than its worth?
The FHA insurance you’ve accrued throughout the loan covers this shortfall for you or your heirs. This is one of the biggest benefits of this program.
What will be my heirs’ responsibility?
If you pass and your home is slated to go to your heirs, they have the first right to the home. Assuming there is equity in it, they can refinance it to a regular loan and keep it or sell it and be paid any remaining equity in the home.
What are the closing costs?
The closing costs are a function of many things – the loan amount, the appraised value, program choice etc. What most seniors really want to know is what costs are extracted from their equity and what are out of pocket costs. As of today (Jan 2018) Out of pocket costs are approximately $125-$150 for HUD counseling 2) $475-$525 for an FHA home appraisal. Both items are non-refundable and usually paid via credit or debit card. The balance of the closing costs will be provided in proper disclosures for you.
Can I outlive my reverse mortgage?
No. Another benefit of the reverse mortgage is you can live in your home as long as you pay your taxes & insurance and any applicable dues for your home. The market value, nor your age has any bearing on the benefits the borrowers receive. This is the peace of mind most seniors want and why so many educated seniors are opting for this program.
Will my heirs owe anything on this mortgage if I owe more than the home is sold for?
As stated above, after you pass your heirs will have a choice, to refinance the house or sell the home. If there is not enough equity in the home, then most likely they will sell it. Any shortfall is covered by FHA mortgage insurance which protects your heirs. In most cases a deed in lieu will be used. After all, if there is no equity or negative equity your heirs most likely won’t want the home.
I have heard people get foreclosed upon by the bank, is this true?
If you pay your real estate taxes, insurance, and applicable homeowners or association dues, the bank will not foreclose on you. Any loan with delinquent taxes is subject to county or lender intervention. It is not specific to this loan. The lender does require borrowers to keep their home in good repair. Most seniors do this as a matter of course, but we don’t want to leave anything out here.
Can my line of credit ever be canceled?
No. This is a huge benefit for long-term peace of mind as your credit line increases each year you don’t access it providing extra available cash.
What if I have a mortgage, can I still get a reverse mortgage?
If you have an existing mortgage on your primary residence and you have enough equity, a reverse mortgage can replace your existing mortgage. The monthly principal and interest payments you were making cease, thus creating additional cash flow.
How can I get money out of my home?
There are many options but all hinge on your equity position, program choice, and age. Examples are a lump sum of cash at closing. A line of credit, monthly payments for life or monthly payments for a designated period.
What can I do with my proceeds?
It’s your money – so anything you want.
Are the proceeds taxable?
We are not allowed to give tax advice but, since it is your money, the answer is always, no. We suggest you ask your tax provider.
What are the basic qualifications?
If married only one spouse needs to be 62 or above. You’ll need a decent equity position (this varies by age), so we have to handle this on a case by case basis. The home should be a single family home, villa, multi-family home or town home. Condos that are FHA approved may also qualify. At this time, most condos are not FHA approved.
Will my reverse mortgage proceeds impact my regular Social Security or Medicare?
Generally, no. If you get Supplemental Social Security or Medicaid, we should discuss that.
How does the interest work on a reverse mortgage?
The interest will compound on the outstanding balance of the loan. This occurs monthly.
How does my credit line grow?
Assuming you have a credit line it grows at the same rate as your loan. Example: If you had a loan of $100,000 the outstanding balance would grow to approximately $105,850 after one year. If you had a line of credit for $100,000, that would also grow to approximately $105,850, basically giving you an additional $5,850 of accessible funds. When unused, the credit line compounds just like the loan balance so it can grow very high providing a large safety net for unforeseen expenses. (Calculations were done using a fixed 5% rate + .5% annual mortgage insurance premium and are for example purposes only.)
Why are closing costs higher for this type of loan?
Closing costs are higher because of the long-term security this loan provides. The insurance cost is the primary cost driver which is the lender’s protection against market declines and you living until way past your normal life expectancy. This is why you can live as long as you want in the home and never worry about any market declines.
If my spouse dies what happens with the loan?
Assuming both spouses are on the loan (which is normal protocol) nothing changes. Any income you receive continues and there are no changes to any aspect of the loan.
Can I buy a home with a Reverse Mortgage?
Yes, we have a page specific to that. Click here.
Hopefully, most if not all of your questions are answered. However, I am always available for a free phone consultation with you and your heirs. If you are local, I am also available for a face to face meeting with you and your heirs.
In summary, the key benefits of a reverse mortgage are:
• The ability to live in your home as long as you wish with no mortgage payments. (P&I)
• If equity allows, you may be entitled to monthly income for life.
• If you have a credit line, it can never be canceled and will grow at the same rate as your accrued interest on your loan.
• You can never outlive your reverse mortgage and market values have no bearing on any of the benefits you receive.
• A reverse mortgage can provide long-term peace of mind and allow a senior to make their home, their forever home.
Reverse mortgages allow your home to support you vs. you supporting your home. As we age, unexpected bills arise, cost of living increases and social security income is cut when we lose our spouse. Having a reverse mortgage allows you the peace of mind to live in your home as long as you wish. It also can provide income (assuming adequate equity/program choice) for life when life deals us an unexpected expense.
So, is a reverse mortgage right for you? Only you can decide, but now you know the benefits and understand the facts versus the mass misconceptions of how this program works.
Please feel free to verify any information on the government’s website @ HUD.gov.
We have done our very best to provide you with the most accurate up to date information on this program. Changes in the reverse mortgage world do happen so please ask us if anything in our FAQ area has materially changed when we speak.
Call anytime, we are here to help.
Tom Russo – National License # 352457
Encompass Mortgage Services, Inc.
Disclosure: Encompass Mortgage Services, Inc. NMLS 1614463 MBR2272
Loan approval is not guaranteed and is subject to lender review of information. Encompass Mortgage Services, Inc. is an equal opportunity mortgage broker. Encompass Mortgage Services, Inc. is approved to originate VA and FHA loans and has the ability to broker such loans to VA/FHA approved lenders. Encompass Mortgage Services, Inc. is not acting on behalf or at the direction of HUD/FHA or the VA. Reverse Mortgage Specific Disclosure: The loan is repaid when the last borrower leaves the home or refinances the home or passes away. When the home is sold or refinanced the proceeds pay back the loan, accrued interest, and mortgage insurance All of the remaining equity goes to the borrower or their heirs. As with any home-secured debt, the homeowner remains responsible for property taxes, homeowners insurance, HOA dues and property maintenance. An under-age spouse is not a borrower and is not on title. Their right to remain in the property for life is dependent on meeting all conditions of the HECM program including continued payment of property taxes and homeowners insurance and maintenance of the property. Available tenure payments or lines of credit extended to the borrower will cease upon their demise and will not be available to the non-borrowing spouse. Tom Russo – Licensed Mortgage Loan Originator NMLS ID 352457