In the world of lending products, reverse mortgages are just one of many resources available to consumers. Unlike conventional mortgages, reverse mortgages allow people to receive money from their property’s accumulated equity. Instead of making a payment to the lender, borrowers receive payments.
Reverse mortgages are recognized for their complexity and potential to confuse consumers. If you’re an elderly individual with inconsistent or insufficient retirement income, these financial products may seem like an easy way to stabilize your finances. To take advantage of such benefits, however, it’s vital to understand exactly how reverse mortgages function.
Eligibility
In the United States, you must be at least 62 years old to participate in a reverse mortgage program. Although your FICO score and credit history will not be evaluated, you will need to have built sufficient equity in your property as determined by your lender.
Your lender may demand that you perform property maintenance or pay for someone to do so at a later date. You also need a plan for paying off your current mortgage.
Reverse Mortgage Payments
The payments you receive from your reverse mortgage can be delivered in any combination your lender provides that works for you. Common options include lump sums, regular monthly payments while you continue to live in the home and lines of credit that include scheduled advances.
Each individual senior has different needs. Thus, there are different disbursement options to cover different needs. This includes the choice to receive funds in a full or partial sum, a line of credit, monthly payments, or a combination of any of these.
The money from a reverse mortgage can be distributed in four ways, depending on the borrower’s financial needs and goals:
– Lump sum in cash at settlement
– Monthly payment (loan advance) for a set number of years (term) or life (tenure)
– Line of credit (similar to a home equity line of credit)
– Some combination of the above
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Note that the adjustable-rate HECM offers all of the above payment options, but the fixed-rate HECM only offers lump sum.
The line of credit option accrues growth, meaning that whatever is available and unused on the line of credit will automatically grow larger at a compounding rate. This means that borrowers who opt for a HECM line of credit can potentially gain access to more cash over time than what they initially qualified for at origination.
The line of credit growth rate is determined by adding 1.25% to the initial interest rate, which means the line of credit will grow faster if the interest rate on the loan increases.
On 3 September 2013 HUD implemented Mortgagee Letter 2013-27, which made significant changes to the amount of proceeds that can be distributed within the first year of the loan. Because many borrowers were taking full draw lump sums, often at the encouragement of lenders, burning through the money quickly, HUD sought to protect borrowers and the viability of the HECM program by limiting the amount of proceeds that can be accessed within the first 12 months of the loan.
If the total mandatory obligations, which includes existing mortgage balances, all closing costs, delinquent federal debts, and purchase transaction costs, to be paid by the reverse mortgage are less than 60% of the principal limit, then the borrower can draw additional proceeds up to 60% of the principal limit in the first 12 months. Any remaining available proceeds can be accessed after 12 months.
If the total mandatory obligations exceed 60% of the principal limit, then the borrower can draw an additional 10% of the principal limit if available.
COMMON QUESTIONS:
Are There Hidden Costs To A Reverse Mortgage? What Happens If Mortgage Rates Change?
The fact that you don’t make payments doesn’t mean reverse mortgages are free money. For instance, you still have to pay your full property taxes and home insurance policy premiums. In addition, you’ll be subject to variable fees defined by your lender.
What do your fees cover? A portion goes towards premiums for your lender’s annual mortgage insurance. They also cover applications, closing costs and any other servicing fees your lender may charge.
Like IMIP, annual mortgage insurance is charged by FHA to insure the loan accrues annually at a rate of 1.25% of the loan balance. Annual mortgage insurance does not need to be paid out of pocket by the borrower; it can be allowed to accrue onto the loan balance over time.
Servicing fees are less common today than in the past, but some lenders may still charge them to cover the cost of servicing the reverse mortgage over time. Servicing fees, if charged, are usually around $30 per month and can be allowed to accrue onto the loan balance, they don’t need to be paid out of pocket.
Mortgage insurance began in the United States in the 1880s, and the first law on it was passed in New York in 1904.
The industry grew in response to the 1920s real estate bubble and was “entirely bankrupted” after the Great Depression. By 1933, no private mortgage insurance companies existed. The bankruptcy was related to the industry’s involvement in “mortgage pools”, an early practice similar to mortgage securitization. The federal government began insuring mortgages in 1934 through the Federal Housing Administration and Veteran’s Administration, but after the Great Depression no private mortgage insurance was authorized in the United States until 1956, when Wisconsin passed a law allowing the first post-Depression insurer, Mortgage Guaranty Insurance Corporation, to be chartered.
This was followed by a California law in 1961 which would become the standard for other states’ mortgage insurance laws. Eventually the National Association of Insurance Commissioners created a model law.
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It’s also important to remember that interest can still accumulate during your reverse mortgage. Since you aren’t making payments, this interest is usually added to the outstanding balance of your loan. This means that if you continue living in the home for many years or housing markets slump and reduce your equity, the value of your loan may be higher than what your house is actually worth.
However, reverse mortgages can feature fixed or adjustable interest rates. Although interest rates are capped at a certain maximum, your lender can include a margin.
If you’re not using reverse mortgages intelligently, you’re likely to lose out. On the other hand, those who handle lending wisely without relying on it too heavily may be able to increase their sense of financial security. Always talk to a financial advisor before getting into a reverse mortgage, and ensure your chosen lender is approved by the Department of Housing and Urban Development.
You have other options to protect your interests as well. Mortgage Insurance is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan. Mortgage Insurance can be either public or private depending upon the insurer.
The reverse mortgage loan is insured by the federal government. With federal insurance comes greater security. If the loan ends up amounting to more than the value of the home when sold, government insurance can cover the difference. This means that the loan will be paid in full using only the proceeds your home sells for, and no more.
Will A Reverse Mortgage Jeopardize My Social Security Payments, Pension Payment And My Medicare Eligibility?
A common concern people have with a Reverse Mortgage is if benefits will be affected when you receive a Reverse Mortgage. Will you still be able to collect Social Security? Will your pension be affected? What happens to your Medicare or Medicaid benefits? There are a lot of myths about what happens to your benefits, here are the facts with your benefits and getting a Reverse Mortgage.
Social Security Benefits:
A Reverse Mortgage does not affect your Social Security benefits. You will still be able to receive your benefits and they will not change once you have your Reverse Mortgage. You have been paying into your Social Security while you have been working, and receiving a Reverse Mortgage will not affect your benefits. For example, let’s say you have had three jobs over your working life time. While you working, you paid into Social Security. Now you are retired, finally able to collect on your Social Security. Then you decide that a Reverse Mortgage makes sense for you. Deciding to have a Reverse Mortgage will not affect your Social Security benefits.
Pension Benefits:
Your pension benefits are something you established with your employer and this cannot be affected by receiving a Reverse Mortgage. For example, let’s say you worked for 30 years and had a well established pension when you retired. That well established pension you built up over 30 years will not be affected if you choose to take a Reverse Mortgage. Your pension is something you saved and worked hard for. In no way can your pension be affected by receiving a Reverse Mortgage.
Medicare:
In 1965, Congress created Medicare under a part of the Social Security Act to help seniors with healthcare costs. Medicare was a way to provide health insurance to people age 65 and older. This government program is available to assist seniors in paying for their healthcare. Like Medicare, a Home Equity Conversion Mortgage (HECM) Reverse Mortgage offered by One Reverse Mortgage is a government program that helps seniors financially. That means you keep your Medicare benefits when you received a Reverse Mortgage, and vice versa.
Medicaid
The only thing that could possibly be affected with a Reverse Mortgage is your Medicaid benefits. Medicaid eligibility requires applicants to have no more than $2,000 ($3,000 for a couple) in assets on any day out of the month. This however, does not affect your eligibility for a Reverse Mortgage because to your income is not a factor with a Reverse Mortgage. You can still receive a Reverse Mortgage but you may not be able to receive your Medicaid benefits.
Will I Retain Ownership Of My Home?
A common misconception of reverse mortgages is that the lender takes ownership of your home. This is false. You continue to maintain ownership of your home, as long as you comply with the terms of the loan and pay your taxes and insurance.
The reverse mortgage does not prohibit a borrower from having anyone else live in the property such as a family member of a live-in caregiver. The borrower may certainly bring in help to assist them in their living needs whether that be family or a paid medical caregiver. If and when the borrower leaves the home to permanently reside in a nursing care facility or pass, then the loan would become due and payable and it would be up to the heirs of the borrower to contact the servicer to make arrangements to sell the property, refinance the loan or pay off the loan with other funds.
Taking an extended vacation is the one that gets into the gray area. The Security Instrument for the Home Equity Conversion Mortgage states specifically that if the property ceases to be the principal residence of at least one of the original borrowers during a period of 12 consecutive months after closing due to mental or physical illness, then there are grounds for acceleration of the debt, it can be called Due and Payable.
In other words, if a borrower is forced to go to a hospital for more than 12 consecutive months and there is not still one original borrower remaining in the home, not a family member, but a borrower who is on the loan, then the loan shall become Due and Payable and must be paid in full at that time. The documents do not state specifically how long a borrower can be out of the home for an “extended absence” for things other than mental or physical illness, like a vacation. Most of the time it’s only a matter of contacting the servicer, notifying them that you will be on an extended vacation in case they try to contact you while you are gone and everything is fine. However, that would depend on the time of the absence.
If you have a reverse mortgage and you get the opportunity to travel for extended periods, notify your servicer and make sure they are aware of the circumstances. As long as they are sure that the home is still occupied as your primary residence and that the borrowers have not left the home, they can work with you to make certain there are no miscommunications. The troubles typically start when people think they need to hide something and when servicers can’t get in touch with borrowers, that’s when it really appears the home has been vacated for good and the servicer needs to take action.
What Happens If I Die, Want To Move To Another Dwelling Or Leave My Home For An Extended Period Of Time?
One of the most attractive benefits of reverse mortgages is that payments are made to you, as long as you live in your home. This is quite different from a traditional forward mortgage where you must pay funds in a monthly amount. With reverse mortgages, you receive funds. The loan is repaid when you sell your home, move to another primary residence, or when the last borrower leaves the home.
So, this means that the reverse mortgage is not due and payable until the last borrower or non-borrowing spouse dies, sells the house, or fails to live in the home for a period greater than 12 months. The loan may also become due and payable if the borrower fails to pay property taxes, homeowners insurance, lets the condition of the home significantly deteriorate, or transfers the title of the property to a non-borrower which is excluding trusts that meet HUD’s requirements.
Once the mortgage comes due, borrowers or heirs of the estate have several options to settle up the loan balance:
– Pay off or refinance the existing balance to keep the home.
– Sell the home themselves to settle up the loan balance and keep the remaining equity.
– Allow the lender to sell the home and the remaining equity is distributed to the borrowers or heirs.
The reverse mortgage is a non-recourse loan, which means that the only asset that can be claimed to repay the loan is the home itself. If there’s not enough value in the home to settle up the loan balance, the FHA mortgage insurance fund covers the difference.
Wade Pfau of The American College and McLean Asset Management, highlights what consumers need to know about repaying a reverse mortgage. This includes knowing that reverse mortgage payments, though not required, may still be made at the borrower’s discretion.
“Repayment of a home equity loan balance may be deferred until the last borrower or non-borrowing spouse has died, moved, or sold the home,” Pfau writes. “Prior to that time, repayments can be made voluntarily at any point to help reduce future interest due and to allow for a larger line of credit to grow for subsequent use. There is no penalty for early repayment.”