Reverse Mortgage

United States Eligibility

To qualify for the FHA-insured Home Equity Conversion Mortgage ( HECM) reverse mortgage, borrowers must be at least 62 years of age and the home must be their primary residence (second homes and investment properties do not qualify).^[16]

For a reverse mortgage to be a viable financial option, existing mortgage balances usually must be low enough to be paid off with the reverse mortgage proceeds.^[18] However, borrowers do have the option of paying down their existing mortgage balance to qualify for a HECM reverse mortgage.

The HECM reverse mortgage follows the standard FHA eligibility requirements for property type, meaning most 1–4 family dwellings, FHA approved condominiums, and PUDs qualify.^[19] Manufactured homes also qualify as long as they meet FHA standards.

Before starting the loan process for an FHA/HUD-approved reverse mortgage, applicants must take an approved counseling course.^[20] An approved counselor should help explain how reverse mortgages work, the financial and tax implications of taking out a reverse mortgage, payment options, and costs associated with a reverse mortgage. The counseling is meant to protect borrowers, although the quality of counseling has been criticized by groups such as the Consumer Financial Protection Bureau.^[1]

In a 2010 survey of elderly Americans, 48% of respondents cited financial difficulties as the primary reason for obtaining a reverse mortgage and 81% stated a desire to remain in their current homes until death.^[21]

There are certain protections to spouses younger than age 62. Under the old guidelines, the reverse mortgage could only be written for the spouse who was 62 or older. If the older spouse died, the reverse mortgage balance became due and payable. If the surviving spouse didn't have the ability to pay off or refinance the reverse mortgage balance, he or she was forced to either sell or give up ownership of the home. This often created a significant hardship for spouses of deceased HECM mortgagors, so FHA revised the eligibility requirements. Under the new guidelines, spouses who are younger than age 62 at the time of origination retain the protections offered by the HECM program if the older spouses dies. This means that the surviving spouse can remain living in the home without having to repay the reverse mortgage balance as long as they keep up with property taxes and homeowners insurance and maintain the home to a reason

Borrower’s age at origination

Expected interest rate (EIR)

Principal limit factor (as of Aug. 4, 2017,
down considerably since 2014)^[24]

Initial principal limit based on MCA of $600,000

Initial principal limit based on MCA of $250,000

The new principal limit factor table (as of Aug 2017) can be accessed on HUD’s web site and see bottom of page

average HECM fixed rate was 5.06% for Dec 2016

2017 seniors can borrow less money. The average borrower at current interest rates will be able to borrow roughly 58% of the value of their home, down from 64%.”

5.5%

0.403

241,800

$100,750

7.0%

0.333

200,000

$83,250

5.0%

.465

279,000

5.5%

0.467

280,200

$116,750

7.0%

0.400

240,000

$100,000

5.5%

0.570 ~~0.644 (2014)~~

~~$161,000~~

7.0%

0.511 ~~0.513 (2014)~~

~~$128,250~~

Criticism

Reverse mortgages have been criticized for several major shortcomings:

Possible high up-front costs make reverse mortgages expensive. In the U.S., entering into a reverse mortgage will cost approximately the same as a traditional FHA mortgage; depending on the loan-to-value.

The interest rate on a reverse mortgage may be higher than on a conventional "forward mortgage".^[44]

Interest compounds over the life of a reverse mortgage, which means that "the mortgage can quickly balloon".^[13]
Since no monthly payments are made by the borrower on a reverse mortgage, the interest that accrues is treated as a loan advance.
Each month, interest is calculated not only on the principal amount received by the borrower but on the interest previously assessed to the loan. Because of this compound interest, as a reverse mortgage's length grows, it becomes more likely to deplete the entire equity of the property.^[13]
That said, with an FHA-insured HECM reverse mortgage obtained in the US or any reverse mortgage obtained in Canada, the borrower can never owe more than the value of the property and cannot pass on any debt from the reverse mortgage to any heirs. The sole remedy the lender has is the collateral, not assets in the estate, if applicable.

Reverse mortgages can be confusing; many obtain them without fully understanding the terms and conditions,^[44] and it has been suggested that some lenders have sought to take advantage of this.^[45]
A majority of respondents to a 2000 survey of elderly Americans failed to understand the financial terms of reverse mortgages very well when securing their reverse mortgages.^[21]
"In the past, government investigations and consumer advocacy groups raised significant consumer protection concerns about the business practices of reverse mortgage lenders and other companies in the reverse mortgage industry"^[46]
But in a 2006 survey of borrowers by AARP, 93 percent said their reverse mortgage had a mostly positive effect on their lives, compared with 3 percent who said the effect was mostly negative.
Some 93 percent of borrowers reported that they were satisfied with their experiences with lenders, and 95 percent reported that they were satisfied with the counselors that they were required to see.^[47]

A reverse mortgage or home equity conversion mortgage (HECM) is a type of home loan for older homeowners (62 years or older) that requires no monthly mortgage payments. Borrowers are still responsible for property taxes and homeowner’s insurance.
Reverse mortgages allow elders to access the home equity they have built up in their homes now, and defer payment of the loan until they die, sell, or move out of the home.
Because there are no required mortgage payments on a reverse mortgage, the interest is added to the loan balance each month.
The rising loan balance can eventually grow to exceed the value of the home, particularly in times of declining home values or if the borrower continues to live in the home for many years.
However, the borrower (or the borrower’s estate) is generally not required to repay any additional loan balance in excess of the value of the home.^[1]

Proceeds from a reverse mortgage

The money from a reverse mortgage can be distributed in several different ways:^[5]

as a lump sum, in cash, at settlement
as an annuity, with a cash payment at regular intervals
as a line of credit, similar to a home equity line of credit
as a combination of these.

Taxes and insurance

The borrower remains entirely responsible for the property. This includes physical maintenance.^[5] In addition, some programs require periodic reassessments of the value of the property.^[5]^[7]

Income from a reverse mortgage set up as an annuity or as a line of credit should not affect Government Income Support entitlements.^[5]^[9]
However, income from a reverse mortgage set up as a lump sum could be considered a financial investment and thus deemed taxable ; this category includes all sums over $40,000 and sums under $40,000 that are not spent within 90 days.^[9]

When the loan comes due

The reverse mortgage comes due – the loan plus interest must be repaid – when the borrower dies, sells the property, moves out of the house, or breaches the contract in some way.^[5]

Prepayment of the loan – when the borrower pays the loan back before it reaches term – may incur penalties, depending on the program.^[5]^[8] An additional fee could also be imposed in the event of a redraw.^[8]

"Some providers offer a 'no negative equity guarantee'. This means that if the balance of the loan exceeds the proceeds of sale of the property, no claim for this excess will be made against the estate or other beneficiaries of the borrower."^[5]^[7]

On 18 September 2012, the Government introduced statutory 'negative equity protection' on all new reverse mortgage contracts. This means you cannot end up owing the lender more than your home is worth (the market value or equity).

When the reverse mortgage contract ends and the borrowers home is sold, the lender will receive the proceeds of the sale and the borrower cannot be held liable for any debt in excess of this (except in certain circumstances such as fraud or misrepresentation). Where the property sells for more than the amount owed to the lender, the borrower or their estate will receive the extra funds.

^{COSTS CAN BE}

Real estate appraisal = $175–$400
Legal advice = $400–$600
Other legal, closing, and administrative costs = $1,495

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you don’t have to make monthly payments. The lender doesn’t collect until the homeowner moves, sells or dies. Once the home is sold, any equity that remains after the loan is repaid is distributed to the person’s estate.

To qualify, you have to be 62 or older.

You would have to make payments on a line of credit or loan.

The fact that counseling is required from a government-approved agency for loans made through the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) program is an indication of the complexity of this financial product. Still, many seniors don’t understand what they are getting into.

People complained to the CFPB about their loan terms, the loan servicing companies, and not being able to add a borrower. Adult children complained that lenders refused to add them as an additional borrower or allow them to “assume” the loan for an aging or deceased parent, the report said.

CFPB tips :-

▪ Double check that your loan records accurately reflect who is on the mortgage.
▪ Be sure to understand the risks of not including a spouse on the loan. Often an older spouse will take out a reverse mortgage in his or her name only because older homeowners are able to borrow against a greater percentage of the home’s equity.

“Non-borrowing spouses submit complaints distraught that they are facing foreclosure and about to lose their home after their husband or wife dies,” according to the report. “Other non-borrowing spouses submit complaints worried about their ability to remain in their home should the older spouse die first.”

If you decide it’s financially better for just one spouse to take out a reverse mortgage, be sure to have a plan for the non-borrowing spouse. Can a surviving spouse stay in the home? The Department of Housing and Urban Development has attempted to address the issue of non-borrowing spouses. Under certain conditions, some spouses may be able to stay but others may not get that protection.

The CFPB recommends that if only one spouse is on the mortgage, you should find out if the loan servicer will permit the non-borrowing spouse to qualify for a repayment deferral allowing him or her to remain in the home.
▪ Talk to your heirs. If you have adult children or other relatives living in the house, be sure they understand what could happen if the reverse mortgage becomes due.

Go to the CFPB web site at www.consumerfinance.gov and click the link for the agency’s consumer advisory on reverse mortgages.

There are some pros to a reverse mortgage. But the complexity of the product means you better be just as aware of the cons.

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With the equity you've built up in your home you can stop paying a mortgage and a lender starts sending you checks regularly (or in a lump sum or line of credit) !
Reverse mortgages can indeed serve many retirees well, but they're not perfect for everyone, and they have some downsides worth considering.

The basics

A reverse mortgage is essentially a loan, with the amount borrowed not having to be repaid until you die, sell your home, or stop living in it (perhaps because you moved to a nursing home). At that time, the home can be sold to cover the debt, or your heirs can pay it off and keep the home. Reverse mortgage income is often tax-free, which is another big plus.

Dangers, pitfalls, and things to know

There are some dangers and pitfalls associated with reverse mortgages, though, and in many cases, what you don't know can cost you. Let's run through some facts.

For starters, many people have been pressured into reverse mortgages by pushy salespeople. Reverse mortgages can be complicated contracts, too, so be sure to review all the terms closely, to ask questions, and perhaps to have a financial professional review the deal.
Reverse mortgages feature closing costs, just as with regular mortgages, and they tend to be costlier. The applicable interest rates tend to be higher, as well.
You may not receive as much income through a reverse mortgage as you might have expected. The amount you can borrow depends on factors such as how much longer you (and your spouse, if you have one) are expected to live, the value of the home, the equity you have in it, and prevailing interest rates. Interest charges are added to the balance of the loan over time.
You'll still be on the hook for home-related expenses such as property taxes, home insurance, home repairs, and maintenance. Those can be substantial. Miss out on some of these payments, such as property taxes, and your lender might be able to close out the loan, causing you much grief.
Once you leave your home, it will likely need to be sold to pay off the reverse mortgage. If you'd hoped to leave it to your children, you won't be able to do so unless the reverse mortgage loan can be paid off in some other way. Some people have run into trouble if they got sick and were out of their home for an extended time, such as in rehab -- as their lender then moved to close out the loan and take possession of the house.
Receiving income from a reverse mortgage might hurt your eligibility for various benefits, such as Medicaid and Supplemental Security Income. So while it can boost your income, it may also reduce it.
In the past, when a reverse mortgage holder has died, the surviving spouse often ended up defaulting on the loan and facing foreclosure. Regulations have recently strengthened protections for spouses, but it's worth taking a close look at any fine print and asking pointed questions. It can be especially dangerous if your spouse is not included in the loan.
When some people have tried to refinance their mortgage, they've discovered that their equity is much smaller than they thought, because holding a reverse mortgage shrinks your equity in part via accrued interest expenses over time.
Some people have complained to the Consumer Finance Protection Bureau that their reverse mortgages with variable interest rates raised the rates too quickly, costing them more, and that they were not able to renegotiate terms.
If you're not disciplined, you can spend too much of your reverse mortgage money too soon (especially if you've received it as a lump sum) and can end up in worse financial shape.

Be smart about reverse mortgages

The key to knowing whether a reverse mortgage is right for you is to learn everything you can about them. In some cases, if you need the income and liquidity that they can provide, then reverse mortgages will be a good tool in your retirement financial plan.

A reverse mortgage can be a terrific solution for those who find themselves cash-poor in retirement. It's far from a simple thing, though, and it does have some drawbacks and warrants some cautions.
If you're thinking of getting a reverse mortgage, here are some smart reverse mortgage moves you might want to make.

Be wary of anyone urging you to get a reverse mortgage.
Reverse mortgages are sometimes pushed by those with conflicts of interest and those who may not offer you the best deal. Do your own homework, shop around, and perhaps approach lenders on your own instead of through a salesperson.
Think of the reverse mortgage as a loan, and not as an investment.
With a reverse mortgage, you essentially borrow money based on your home equity and don't have to pay it back until you die or stop living in your home. The lender pays you in regular installments or a lump sum or gives you a line of credit. Don't let any salesperson tell you that a reverse mortgage is a smart investment. They generally cost a lot and are not all about growing your wealth.
Know that a reverse mortgage will often remove your ability to leave your heirs your home.
If you've been planning to leave your home to your loved ones, a reverse mortgage can remove those plans. When you die or permanently leave your home (such as by moving into a nursing home), your loan will often need to be repaid. They often requires the immediate sale of your home. But if your heirs can pay off the loan, they may be able to keep the home.
Know that the amount you have borrowed will increase over time.
When you get a reverse mortgage, it won't be for the total value of your home. It will be for a portion of that, and your loan balance will rise over time, as interest costs are added to it. When the mortgage ends and the loan needs to be repaid, you won't be on the hook for more than the balance of your home.
Know that as with regular mortgages, there will be closing costs.
Reverse mortgages tend to be more costly than regular mortgages. The kinds of costs you may pay include a loan origination fee, servicing fees, and title insurance. Typically there's also mortgage insurance.
Know that reverse mortgage income could hurt you in unexpected ways.
Receiving income from a reverse mortgage might hurt your eligibility for various benefits, such as Medicaid and Supplemental Security Income.
Include your spouse in the reverse mortgage or have a provision for him or her.
The amount you can borrow with a reverse mortgage depends in part on the age of the borrower, and when a couple is borrowing, it's typically the age of the younger one that matters. In the past, when reverse mortgages have been taken out by one partner who later dies or moves out, the other partner has sometime been forced to sell the home or has defaulted on the loan and faced foreclosure. Recent regulations have better protected spouses, but it's worth looking into the terms of the reverse mortgage you're considering, to learn just how your spouse will be treated and whether it's smart to have both of you as borrowers. Note, too, that any children or others who live with you may be adversely affected by a reverse mortgage coming due.
Before getting a reverse mortgage, consult a financial counselor.
You can find a reverse mortgage counselor via the U.S. Department of Housing and Urban Development's website or their housing counselor referral service at 800-569-4287. You might also consult with a financial advisor or two, to explore all your options and make informed decisions. You can look for a fee-only one at www.napfa.org . With any advisor you consult, ask whether they have any ties to the mortgage industry and will benefit in any way if you get a reverse mortgage.
Consult with your family, too.
If you're getting -- or even thinking about getting -- a reverse mortgage, it's a good idea to let your family members know about it and to make sure they know how that might affect them.
Remember that you may have other options, and look into them.
There are often other income-producing options you might look into, besides mortgages. Consider dividend-paying stocks, for example, or annuities, or perhaps a home equity loan. Remember that Social Security will offer some income in retirement, too, but the average annual benefit was recently only about $16,000.

United States Eligibility

Financial assessment

Interest rates

Initial interest rate (IIR)

Expected interest rate (EIR)

Amount of proceeds available

Options for distribution of proceeds