What comes to mind when you think about a reverse mortgage? Many people have developed an opinion without first gathering the facts. To help separate the facts from the fiction, we sat down with Reverse Mortgage Consultants Mike Poole and Sue Haviland.
A reverse mortgage, also known as a home equity conversion mortgage, allows homeowners 62 years and above to access the home equity they have built in their homes and defer any payments until they sell, or no longer live in the home. The first FHA-insured reverse mortgage was introduced in 1989.
Who might benefit from a reverse mortgage?
Sue: Any homeowner age 62 and better who intends to remain in their home and would like to eliminate their current mortgage payment or supplement their cash flow might be a good candidate for a reverse mortgage. The proceeds from a reverse can be used for practically any purpose- pay off high-interest debt, pay for in-home health care, home modification, establish a line of credit for unforeseen expenses, overall retirement planning, just to name a few. There are also protections in place for a spouse who is not yet 62 years old.
If you get a reverse mortgage, do you still own your home?
Mike: Yes, this is one of the biggest misconceptions. Some people believe they are ‘signing their home over to the bank’ if they do a reverse mortgage. This couldn’t be further from the truth. The homeowner still remains on title/deed to the home and continues to own it. They can sell or move at any time.
What can the money be used for?
Mike: There are no restrictions on what the money can be used for, however, some of the common things are: Home improvements/renovations, eliminating existing mortgage payment, assist with medical needs (in-home assistance, medical bills, medications, etc..), leave in line-of-credit to grow for future use, purchase a vacation home, etc. Again, each household needs are unique so how they use the money is personal to them.
What factors determine how much money you can receive from a reverse mortgage?
Sue: The age of the youngest borrower, the appraised value of the home ( as determined by an FHA appraisal) and the current interest rates (both fixed and adjustable rate products are available). There are many options within the reverse and the borrower can select the program that best meets their needs and goals.
How do you receive your money from a reverse mortgage?
Sue: The borrower(s) can choose how the funds are received. Any liens on the property (mortgage, HELOC, taxes, etc) must be paid in full at the time of closing. The remaining available funds may be taken as a lump sum, line of credit, or a monthly check. The borrower(s) may even choose a combination of these options, and can change their mind in the future as needs or goals change.
What if you end up owing the bank more money than the home is worth?
Mike: The loan is FHA insured and it is a non-recourse loan. In the end, if the home value doesn’t support the amount owed on the reverse mortgage loan, FHA pays the bank/investor the shortfall. The heirs/estate are 100% protected from any shortages.
So you won’t have to make a monthly mortgage payment. What about insurance taxes and other homeownership expenses?
Mike: The homeowner will still need to stay current on property tax payments, insurance payments and maintaining the home. This isn’t really unique with a reverse mortgage, however. Without a reverse mortgage property taxes and insurance payments have to be paid and stayed current as well.
If there are no monthly payments, then when do you pay back what you’ve borrowed?
Sue: The reverse mortgage comes due when the last remaining borrower no longer occupies the property as the primary residence- generally when one of the following occurs: (1) borrower passes away, (2) borrower vacates the property (move to assisted living, for example), (3) borrower sells the home
Can you purchase a home with a reverse mortgage?
Sue: Indeed you can! The H4P (HECM for Purchase) product allows a senior to purchase a home that will be used as the primary residence and no monthly mortgage payment is required. Of course, the borrower is responsible for timely payment of all property charges including real estate taxes, homeowner insurance, and condo/HOA fees if applicable and flood insurance if applicable. Imagine sharing this concept with your REALTOR partners!
Why does a reverse mortgage sometimes get a bad reputation?
Mike: This is an excellent question because once it is clearly understood by having all of the facts explained, many folks embrace the program. It has one of the highest satisfaction rates among financial products. Many folks are skeptical of something they don’t understand, so the difference becomes: “Do I take the time to speak with a local and knowledge professional to get the facts?” Another thing, I’ve found people like to think as something as ‘good’ or ‘bad’. With a reverse mortgage, it’s all about what is best for the homeowners. Something good for person ‘A’ might not be so good for person ‘B’. It’s my job to explain all of the facts, and separate the myths so that my clients can make a decision that is in their best interest for short and long term.
Disclaimer: A full or partially funded set aside of proceeds may be required for payment of property charges on the new loan. Home must be occupied as principal residence, required taxes and insurance paid, and all necessary repairs made to avoid deterioration of the property. When the house is sold, the loan, along with any interest and fees, are paid to the lender; any remaining equity belongs to the borrowers or heirs. Advertising materials are not provided or approved by the Department of HUD or FHA.