Before you can learn what a reverse mortgage is, let us start by talking about what it is NOT.
Reverse mortgages are not:
- Just for the desperate
- A trade for your home ownership
- Free money from the government or any other type of entitlement program
In plain English, a reverse mortgage is nothing more than an equity loan secured by your home which is designed to defer the mortgage interest. It’s as simple as that.
The most common type of reverse mortgage is the HECM, which is the acronym for Home Equity Conversion Mortgage. This product was created by the Federal Housing Administration in 1989.
While a traditional home mortgage requires the homeowner to make scheduled monthly payments over a specified term, (usually 30 years) the reverse mortgage interest is not due until the loan reaches maturity. As long as the homeowner still resides in their property and pays their property taxes and insurance they can take advantage of not making monthly payments on the money they borrowed.
You own your home
With a reverse mortgage you continue to own your home, paying your property taxes and homeowners insurance just as before. Like any mortgage, you will receive a monthly statement which will outline all interest charges and balance information. The only difference will be the absence of a coupon to return your monthly payment as no payment is necessary.
What are the qualifications?
Reverse mortgages are available to all US citizens and Permanent Residents age 62 or older with substantial equity in their home. The maximum loan amount you may qualify for is based on the youngest homeowner’s age, current rates, and home value. (visit our calculator to estimate your loan) There is no income or credit score requirements as there are no monthly repayments. You must continue living in your home as your primary residence and continue to pay your properties taxes and insurance.
You’re in the driver’s seat
You can choose to make voluntary repayments of the mortgage interest in part or full without penalty. That’s right; you can make payments back on your reverse mortgage. You can also deduct that mortgage interest just as you would a traditional home loan and you can pay off the entire loan at any time with cash, refinancing or selling.
Some believe that once you get a reverse mortgage the bank will eat all of the homes equity leaving your heirs with nothing but a mound of debt. Wrong. While no one can predict your homes appreciation, you can rest assured that your heirs have no recourse to the reverse mortgage you took.
How is the loan repaid?
Unless repaid voluntarily, the reverse mortgage is not due until the last surviving borrower passes away or fails to occupy the property as their primary residence. The heirs will have ample time (up to 12 months) to complete a sale or refinance transaction to pay back the balance of the loan.
If your heirs choose not to act, the reverse mortgage lender will have no choice but to foreclose on the home. In the event that the sale of the property does not yield sufficient funds to pay off the balance of the loan, the government insurance that you would have paid for as a part of closing your reverse mortgage loan will cover your estate. The Lender will be reimbursed for any shortfall from the Mortgage Insurance fund.
Who is it for?
Anyone who has desires or needs that cannot be met with their current income levels. Reverse mortgages are a great tool to help you stay in the home you love or to simply enhance your retirement years.
Who is it NOT for?
Because there are typical costs associated with setting up a reverse mortgage, (appraisal and origination charges) it is not recommended for people who do not intend to live in their home for a reasonable amount of years to realize its benefits.
What about taxes?
Cash received by any mortgage is not considered income and will not be taxed.
Required counseling
The Federal Housing Administration wants you to fully understand the reverse mortgage and requires that all applicants receive independent 3rd party counseling by phone or in person. Once the counseling is completed you will receive a certificate of completion which is then signed and delivered to your lender of choice. (View a list of approved counselors)
Other considerations
Even though reverse mortgages do not affect public benefits such as Social Security and Medicare, the cash proceeds can impact eligibility for those who are receiving “needs based” state or local assistance. This is not specific to a reverse mortgage but as to any excess funds that could change the qualifications on these types of programs.
Like any mortgage it pays to shop around. Compare offers from both banks and brokers alike and don’t be fooled by the common sales pitch “they’re all the same” or “we service our own loans”. The fact of the matter is ALL reverse mortgages carry the same safeguards, and there is only one federally insured HECM so don’t settle for less money or higher interest charges.
“What is a Reverse Mortgage in plain English” by www.allrmc.com
The experts at All Reverse Mortgage® are here to answer your questions! if you have a question about reverse mortgages give us a call Toll Free (800) 565-1722 or request a quote by clicking here »
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By Cliff Auerswald – Add me to your circles 
Does a reverse mortgage give you all the money your house qualifies for up front? Let’s say the house appraisal is $280,000 and the qualifying amount of the reverse mortgage is $175,000; does the home owner get a check for $175,000? Or is it parceled out in monthly payments?
Hi Robin,
That’s one of the great things about a reverse mortgage, there are a number of ways you can choose to take the money. If your benefit amount is $175,000 and you have no liens on the property, then the next choice you need to make is whether you want the fixed rate or the adjustable rate option. This is one thing that would determine how you would receive the funds.
The fixed rate loan is a “closed-ended” instrument which means that you can only take one draw and that occurs at funding. So if you absolutely want the fixed rate loan, then you would have to take all the money as just a one-time payment. However, the adjustable rate loan has several options available for you to receive your funds. You can choose the same lump sum payment, you can choose to receive monthly payments, you can leave the money in a line of credit that you can access whenever you want or you could choose to take a combination of all the above (i.e. take $50,000 at close to pay off some debts and make home repairs, put $50,000 aside in a line of credit to be used whenever you want and then have the lender use the remaining $75,000 as monthly payments for life).
The choice is yours and the funds can be taken based on your needs and desires and which program you choose. But you do have to remember that your choice will be limited to the lump-sum distribution if you decide you want just the fixed rate option.
Once the family member dies does the Reverse Mortgage keep all contents in the house or can the remaining family members left remove the furniture out of the house etc before the Reverse Mortgage company claim the property back?
Hi Elizabeth,
The reverse mortgage company does not “own” the house at the time the borrower passes. The loan becomes due and payable and it is up to the borrower’s heirs to determine how they want to accomplish this. They can choose to sell the home and repay the loan, refinance the loan in their own name(s) or they can pay the loan off with other funds available to them. The lender does not own the property at this time and they do not own any personal property inside, it still belongs to the heirs of the borrower.
Also, since the loan is a non-recourse loan, the lender can never seek repayment from any other assets to repay the loan. In other words, if the borrowers received all the funds before the prices of homes fell so dramatically in most areas of the country and lived there for many years without having to make payments, all the while accruing interest and now upon passing the property is not worth as much as is owed on the reverse mortgage, the heirs have the option to choose to either repay the obligation at 95% of the current appraised value or simply allow the lender to take the property to repay the obligation. Regardless of which option they choose, they still have the right to all the borrower’s personal belongings and, as stated, the lender cannot seek repayment from any other assets other than the property itself.
Great explanation in layman’s terms of what reverse mortgages are. I found this article helpful in my research and will be in contact after my counseling session is completed. Thanks -Bob