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A reverse mortgage enables older
homeowners (62+) to convert part of the equity in
their homes into tax-free income without having to
sell the home, give up title, or take on a new monthly
mortgage payment. The reverse mortgage is aptly named because
the payment stream is “reversed.” Instead of making monthly
payments to a lender, as with a regular mortgage, a lender
makes payments to you.
Below are some common questions
asked by consumers about reverse mortgages.
What are My Payment Options?
You can choose to receive the money from a reverse
mortgage all at once as a lump sum, fixed monthly
payments (for up to life), as a line of credit, or
a combination of these. The most popular option
chosen by more than 60 percent of borrowers
is the line of credit, which allows you to draw on
the loan proceeds at any time.
How Much Money Will I Get?
The amount of money you get from
a reverse mortgage depends upon your age (or age of
youngest borrower in the case of couples), appraised
home value, current interest rates, and the lending
limit in your area. In general, the older you are and
the more valuable your home (and the less you owe on
your home), the more money you can get.
Does My Home Qualify?
Eligible property types include
single-family homes, manufactured homes (built after
June 1976), condominiums, and townhouses. In general,
co-ops are not allowed. Only the Financial Freedom
"Cash Account" program is available on co-ops
in New York City.
How Can I Use the Proceeds
from a Reverse Mortgage?
The proceeds from a reverse
mortgage can be used for anything, whether its to
supplement retirement income to cover daily living
expenses, repair or modify your home (i.e., widening
halls or installing a ramp), pay for health
care, retire existing debts, buy a new car or
take a "dream" vacation, cover property taxes,
and prevent foreclosure.
Are There Any Special Requirements
to Get a Reverse Mortgage?
As long as you own a home, are at
least 62, and have enough equity in your home, you can
get a reverse mortgage. There are no special income or
medical requirements.
What If I Have An Existing
Mortgage?
You may qualify for a reverse
mortgage even if you still owe money on an existing mortgage.
However, the reverse mortgage must be in a first lien
position, so any existing mortgage must be paid off.
You can pay off the existing mortgage with the reverse
mortgage, or any other savings.
For example, let's say you owe $100,000
on an existing mortgage. Based on your age, home value,
and interest rates, you qualify for $125,000 under the
reverse mortgage program. Under this scenario, you will
be able to pay off ALL the existing mortgage and still
have $25,000 left over to use as you wish.
If, however, you only qualify for
85,000. then you would need to come up with $15,000
from your savings to get the reverse mortgage. Even
then, all the money from the reverse mortgage will have
been used to pay off the existing mortgage. On the
other hand, you won't have a monthly mortgage payment.
Will I Lose My Government
Assistance If I Get a Reverse Mortgage?
A reverse mortgage does not affect
regular Social Security or Medicare benefits. However,
if you are on Medicaid, any reverse mortgage proceeds
that you receive must be used immediately. Funds that
you retain would count as an asset and could impact
Medicaid eligibility. For example, if you receive
$4,000 in a lump sum for home repairs
and spend it all the same calendar month, everything
is fine. Any residual funds remaining
in your bank account the following month would count as an
asset. If the total liquid resources (including
other bank funds and savings bonds) exceed $2,000 for an
individual or $3,000 for a couple, you would
be ineligible for Medicaid. To be safe, you
should contact the local Area
Agency on Aging or a Medicaid expert.
Why Do I Need to Get Counseling?
Counseling is one of the most important
consumer protections built into the program. It requires
an independent third-party to make sure you understand
the program, and review alternative options, before
you apply for a reverse mortgage.
HUD counseling is required for
all reverse mortgages and may be conducted face-to-face
or by telephone.
By law, a counselor must review
(i) options, other than a reverse mortgage, that are
available to the prospective borrower, including housing,
social services, health and financial alternatives;
(ii) other home equity conversion options that are
or may become available to the prospective borrower,
such as property tax deferral programs; (iii) the financial
implications of entering into a reverse mortgage; and,
(iv) the tax consequences affecting the prospective
borrower’s eligibility under state or federal programs and
the impact on the estate or his or her heirs.
When Do I Pay Back My Loan?
No monthly payments are
due on a reverse mortgage while it is outstanding.
The loan is repaid when you cease to occupy your home
as a principal residence, whether you (the last remaining
spouse, in cases of couples) pass away, sell the home,
or permanently move out. The amount owed can never
exceed the value of your home. Furthermore, if the
home is sold and the sales proceeds exceed the amount
owed on the reverse mortgage, the excess money goes to you
or your estate.
Under What Circumstances Should
I Not Consider a Reverse Mortgage?
Because of the upfront costs
associated with a reverse mortgage, if you intend to
leave your home within 2-3 years, there may be other
less expensive options to consider, such as home
equity loans, no-interest loans or grants that may
be offered by your county government or a local non-profit
to repair your home, or a tax deferral program, if
you're having problems paying your property taxes.
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