Over the next three weeks, I will write about everything you need to know about reverse mortgages.  This topic is extremely complex and important.  To adequately present as much relevant information as possible, I will cover it in 3 parts.  This week, I will introduce the basics of reverse mortgages and the types that are available.

financing our golden years

As a daughter, niece and friend, I’ve had the privilege of knowing numerous senior citizens who also owned their homes.  As each of these acquaintances aged, they had to grapple with the challenge of financing their retirement.  Some decided to sell their larger houses and downsize to a less expensive home.  Others decided to “age in place” with the help of a reverse mortgage.  What are reverse mortgages and are they the right choice for you?

What is a reverse mortgage?

A reverse mortgage is a loan that provides supplemental income to a homeowner who is 62 or older based on the equity in the home.  Unlike other loan products, the reverse mortgage proceeds are paid to the senior citizen and do not have to be repaid until the house is sold or when the borrower no longer lives in the home.  Unlike traditional mortgages, the amount that is owed on a reverse mortgage increases over time. 

What types of Reverse Mortgages are Available?

These loans are offered by some state and local governments as well as non-profit organizations to assist senior citizens with a specific issue such as home repairs or outstanding property taxes.  Not all areas offer this financing to homeowners.  In many cases, the funds are only available to low- and moderate-income residents.  Single-purpose reverse mortgages are not federally insured. 

These products are offered by various banks and finance companies.  The fees and interest rates will vary from one lender to the next.  Proprietary reverse mortgages are not federally insured and are designed for high value homes. 

This is the only reverse mortgage insured by the Federal Housing Administration (FHA) and available through FHA approved lenders.  HECM’s are the most popular reverse mortgages.  The remaining information will pertain to HECM’s.

How Do I Qualify for an HECM?

To qualify for a federally insured reverse mortgage, the senior citizen must:

• Own the home outright or have a small mortgage on the home.
• Use the home as a primary residence, in most cases.
• Have enough income to continue paying property taxes, homeowner’s insurance premiums and maintenance on the home.
• Not have any defaulted debts to the federal government such as IRS taxes or student loans.
• Participate in a counseling session with an objective FHA approved counselor. The counseling is mandated so senior citizens can make informed decisions before taking the loan.

How Much Can I Borrow?

Every borrower has a situation that differs from the next borrower.  As a result, there is no set amount for the loan.  Each transaction is handled on its own merits as determined by:

• the age of the youngest borrower or the youngest borrower’s spouse at the time of the closing (regardless of whether the spouse is a borrower),
• the current interest rate
• the lesser of the appraised value, HECM program limits or the estimated selling price of the home.  You typically cannot use more than 80% of your home’s equity based on its appraised value.

When is the Reverse Mortgage Repaid?

The unique aspect of a reverse mortgage is that no monthly payments are required.  The loan must be repaid in full when:

• the house is sold
• the last borrower is no longer using the home as a primary residence
• the non-borrowing spouse is no longer using the home as a primary residence