Reverse Mortgages - Frequently Asked Questions

Part 2 of 5 - Reverse Mortgages — Frequently Asked Questions ...

Reverse Mortgages are quite different from conventional mortgages. In this section we answer typical questions that potential borrowers ask. We encourage you to discuss more detailed and specific questions with a counselor.

If you fail to make regular payments, you could lose your home. With a Reverse Mortgage, you borrow against the equity you have built in your home to produce income, or a line of credit. The debt is paid off at the end of the loan by selling the home, or using other assets to pay off the loan. You cannot lose the house during the life of the Reverse Mortgage loan for not making payments, because you don't have any payments to make. Meanwhile, the debt (loan balance including interest and fees) increases and your equity shrinks.

Won't that leave me in debt after I die?

Not in debt to the mortgage lender beyond the value of your home. The Reverse Mortgage lender can never require more repayment than the value of your home when it sells. This is called a non-recourse loan. When you or your surviving co-borrower dies, the sale of the house settles the loan. The lender does not have recourse to your other assets or to your heirs.

If the loan ends for some other reason (such as if you move to an assisted living facility), the house will have to be sold or the loan paid off some other way. If you plan to leave your home to your children to inherit, think twice before you take out a Reverse Mortgage.

There are certainly things to look out for; we will discuss these in the fourth section of this booklet. But in general the answer is “not usually.” Think of it this way: when you bought your home, you depended on money you didn't yet have to pay off the loan (your income). With a Reverse Mortgage, the loan is paid by money you already have (the value of your home). The lender cannot require more than that. You could think of it as a loan that has already been paid.

The best short answer to that question is: “It depends.”  In general, the amount you can receive depends on five things:

1. The mortgage program and program options you select.
2. The age of the youngest borrower when you take out the loan.
3. The appraised value of your home.
4. Current interest rates.
5. The amount of equity in your home.

In any program, the most cash generally goes to the oldest borrower(s), living in the most expensive home, when interest rates are low.  The youngest borrowers, living in the least expensive homes, when interest rates are high, get the least cash. But, it is important to remember that the amount you could get each month, and the total amount you could get over the life of the loan, depends on the program and options you select. No single program works best for everyone. We discuss programs and options further in the next section of this booklet.

There are no restrictions on how you use the money from a Reverse Mortgage. Some borrowers use the proceeds of the loan to repair or remodel the home. Others use the money to improve their lifestyle — free themselves from financial worries, take more trips or keep the money in reserve (a line of credit) to handle future unplanned expenses. Still others receive regular payments to help pay their monthly bills or medical expenses. It's up to you.

Different programs have different requirements, but most programs:

• require the youngest borrower to be at least 62 years old at the time the loan closes;
• will loan on owner-occupied single-family homes (some programs will also loan on 2-4 unit owner-occupied dwellings, federally approved condominiums, planned unit developments or manufactured homes on foundations);
• will not loan on mobile homes or cooperative apartments;
• require that your home is your “principal residence,” meaning you must live there more than half of each year;
• require that your home meets minimum FHA property standards;
• require that you pay off any existing mortgage or other liens against your home before getting the Reverse Mortgage, or use an immediate cash advance from the Reverse Mortgage to pay them off. (If you cannot pay off the existing mortgage or don't qualify for a large enough cash advance, you will not be able to get a Reverse Mortgage.)

While income and general credit history are not considerations for obtaining a Reverse Mortgage, if borrowers are a year or more delinquent in their property tax or insurance payments, an amount equal to three years of taxes and insurance may be set aside in the loan to pay them in the future.

In this case, the only option for the younger homeowner is to make out a quitclaim deed, releasing their interest in the home to the borrower. The drawback is that when the borrower dies or leaves the home, the loan becomes due, and the home may have to be sold to pay it. If both borrowers are over 62 and own the home as joint tenants or in a family trust and one dies or leaves, the loan continues and the remaining borrower can continue to live in the home. For tenants-in-common there is no right of survivorship so when either party dies, the loan ends and must be paid.

Again, the short answer is: “It depends.” Because costs vary so much between lenders, and are so difficult to compare, a standard of comparison has been developed called Total Annual Loan Cost (TALC). We will discuss this in more detail in the last section of this booklet. In general, costs come under three categories:

1. When you apply for the loan, lenders charge an application fee, which pays for an appraisal to determine how much your home is worth and a check to see if you are delinquent on any federally insured loans. This out-of-pocket fee may not be refunded if you later change your mind about taking out the loan.
2. At the loan closing (signing), a number of fees take effect. Most of them can be financed. They become part of the loan, and would also accrue interest. Many of these fees are similar to those for conventional mortgages; others are unique to Reverse Mortgages. The two fees that generally vary the most between lenders are the origination fee and the ongoing fees for servicing the loan. You should check these fees specifically when comparing loans.
3. When the loan ends, there may also be shared equity or shared appreciation fees. These could entitle the lender to a percentage of the remaining value of the home. When comparing loans, check to see if there are any additional fees when the loan ends.

The general requirements are:

• That you pay your property taxes on time.
• That you keep your homeowner insurance current.
• That you maintain your home in good repair.

All current programs use adjustable interest rates, either computed annually or monthly (rarely semiannually), depending on the program. Most borrowers choose monthly rates; sometimes there is not a choice. Rates are usually a bit higher than for conventional mortgages, some are much higher. Shop around before deciding on a program.

Typically the loan ends when the last surviving co-borrower dies, moves away or doesn't live in the home for 12 consecutive months. If the loan is for a fixed amount of time (term), it becomes due when that time runs out. It is also possible the loan could end if you fail to meet the homeowner requirements mentioned above, though most lenders will work with you to meet those requirements.

The amount you owe at the end of the loan (your loan balance) consists of:

• All the money you borrowed, including any you used to pay loan-closing costs.
• All the accrued interest on that money and any financed fees — up to the loan's non-recourse limit, the fair market value of your home.

In most cases, the loan is paid when the last surviving borrower dies or moves away. Some people choose to pay off the loan early. There are three ways of paying off the loan:

1. You or your heirs can sell the house. Either the sale will cover the loan or it will net more than the loan. Any proceeds of the sale beyond what is required to pay off the mortgage belong to you or your heirs. The lender can never get more than the fair market sale price of the home. Your other assets and your heirs are safe.
2. Other assets you or your heirs have could be used to pay off the loan (for example: life insurance or stock). The lender gets the money and you or your heirs keep the house.
3. If there is enough equity left, you or your heirs can refinance the home (probably with a conventional mortgage) and pay off the loan that way.

Social Security and Medicare benefits are not affected, since they are not based on income or assets. Supplemental Social Security Income (SSI) and Medicaid/MediCal do have income constraints. Loan advances generally do not affect your benefits if you spend them during the month in which you get them. If you don't spend them in that calendar month (keep them in a savings or checking account, for example), they count as “liquid assets” and could affect your eligibility. An annuity purchased with a Reverse Mortgage could also make you ineligible. Check with the local SSI or Medicaid office, a senior-citizen’s attorney or a reverse mortgage counselor, to clear up any specific questions you may have.

Generally, the IRS does not consider loan payments made to you as income, so they are not taxed. The interest the lender charges you on the loan can only be deducted in the year the loan interest is paid, at the end of the loan. Annuities may count as taxable income. Talk with a tax professional for specific advice.

Go to Part 3 - Reverse Mortgages — The Process