A reverse mortgage is a special type of home loan designed for seniors to withdraw the equity from their home.
What’s a reverse mortgage?
A reverse mortgage is a type of home equity loan that has been developed for homeowners who are 62 and older. It enables them to withdraw the equity in their home that they have accumulated over the years, and use these funds to pay down their mortgage, make improvements to their home, pay for medical or living expenses, help out family, or put the money away for unexpected emergencies.
Unlike a traditional loan, there is no required monthly payment. When the funds are advanced, the borrower can choose to make mortgage payments on a monthly basis, or they can just let the interest accrue and repay the loan when they permanently leave the home after they sell their home and move out or pass away.
Proceeds can be received as a line of credit, lump sum, or monthly payments. Homeowners who have an existing mortgage often use the reverse mortgage loan to pay off their existing mortgage and eliminate monthly mortgage payments. Borrowers are required to continue paying property taxes and insurance and maintain the home.
It’s called a “reverse” mortgage because it operates exactly in reverse to a traditional or “forward” mortgage.
Why is it called a “reverse” mortgage?
The loan is called a reverse mortgage because the traditional mortgage payback stream is reversed. Instead of making monthly payments to a lender (as with a traditional mortgage), the lender makes payments to the borrower.
A “reverse” mortgage is different than a traditional or “forward” mortgage in that it operates exactly in reverse. The traditional loan is a falling debt, rising equity loan while the reverse mortgage falling equity, rising debt loan. In other words, as you make payments on a traditional loan, the debt or amount you owe is reduced and therefore the equity you have in the property increases over time.
With the reverse mortgage, you make no payments so as you draw out funds and as interest accrues on the loan, the balance grows and your equity position in the property becomes smaller.
A “HECM” reverse mortgage is the only reverse mortgage insured by the U.S. Federal Government.
What is a “HECM” reverse mortgage?
The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage or HECM, and is only available through an FHA approved lender.
The vast majority of reverse mortgages in the United States are Home Equity Conversion Mortgage (HECM — commonly pronounced “heck-um”) reverse mortgages, which are regulated and insured through the federal government by the Department of Housing and Urban Development (HUD) and the Federal Housing Authority (FHA).
Especially since 2013, the federal government has been refining regulations for its HECM program to better protect eligible non-borrowing spouses, and to ensure borrowers have sufficient financial resources to meet their homeowner obligations.
No, this is not a government loan, but a HECM reverse mortgage is insured by the U.S. Federal Government.
Is this a government loan?
A HECM reverse mortgage is not a government loan. It is a loan issued by a mortgage lender, but insured by the Federal Housing Administration, which is part of HUD.
Each year the borrower is charged an insurance fee of 1.25% of the loan balance. Your loan balance thus increases by the amount of this fee. The insurance purchased by this fee protects the borrower (1) if and when the lender is not able to make a payment; and (2) if the value of the home upon selling is not enough to cover the loan balance. In the latter case, the government insurance fund pays off the remaining balance.
No, a HELOC and HECM are different. A HECM does not require you to pay monthly payments to the lender.
Is this a Home Equity Line of Credit?
No, a Home Equity Conversion Mortgage (HECM) is not the same as a Home Equity Line of Credit (HELOC).
The defining advantage of a HECM over a HELOC, and the characteristic that ends up winning over most seniors, is the fact that the HECM does not require you to pay monthly payments to the lender. You may draw on your credit line as needed without making a monthly payment.
With a HECM Line of Credit, repayment is only required after the last borrower leaves the home, as long as the borrower complies with all loan terms such as continuing to pay taxes and insurance. The HELOC, on the other hand, requires a monthly payment immediately.
The primary requirements: you must be 62+, named on the title, and it must be your primary residence.
What are the requirements?
Reverse mortgages have special terms that make them attractive to senior citizens. First of all, there are no income requirements for a reverse mortgage, and usually no credit requirements. Additionally, you do not have to make payments on your reverse mortgage as long as you’re living in the home ― reverse mortgages are repaid to the lender when the borrower passes away, permanently moves out, or sells the home.
Under the rules of a HECM reverse mortgage, borrowers must be at least 62 years old, named on the title of the home, and use the home as their principal residence. Spouses who do not meet these criteria cannot sign the HECM reverse mortgage loan documents as a borrower and will be identified as either an eligible non-borrowing spouse or an ineligible non-borrowing spouse.
Prior to taking out the loan, borrowers must consult with a third-party counselor, and they must demonstrate that they can manage home upkeep and pay property taxes and insurance.
Here is an overview of the requirements:
- At least one homeowner must be 62 years of age.
- You must reside in the home as your primary residence.
- Your home must be either a single-family home, two to four-unit owner-occupied home, townhouse, approved condominium unit, or certain manufactured homes.
- You must attend an educational HUD-approved counseling session by phone or in person.
- You must continue to pay property taxes and homeowners insurance.
No, only one borrower must be 62 or older, and the other can be a non-borrowing spouse.
Do both spouses have to be over 62?
Under the rules of the HECM reverse mortgage, borrowers must be: at least 62 years old, named on the title of the home, and use the home as their principal residence.
Spouses who do not meet these criteria cannot sign the HECM reverse mortgage loan documents as a borrower and will be identified as either an eligible non-borrowing spouse or an ineligible non-borrowing spouse.
Before August 2014, we did not have protections for the non-borrowing spouse. The non-borrowing spouse was left off the mortgage and not protected. A non-borrowing spouse is one of the spouses that is not signing on the mortgage as a borrower. So if the older spouse passes away, the younger spouse would be forced to move out of the home, sell the property, pay off the reverse mortgage, or refinance the reverse mortgage.
But now, as of August 2014, the non-borrowing spouse is protected. They can stay in their home for the rest of their lives. They just can’t access or borrow any additional funds if there is money left over in the reverse mortgage line of credit. To be protected, the non-borrowing spouse must be living in the home and married to the borrower.
Part of the process is making sure you will have sufficient cash flow to live on.
What is the application process?
Part of the application process is a financial assessment. This assessment is designed to make sure that once people get a reverse mortgage they will have enough money to meet their financial obligations and have enough money to live.
The financial assessment takes a look at their sources of income and assets, and determines if they have sufficient cash flow to live on, otherwise they’re going to be headed to default.
If it comes up there is a shortfall, then the lender may require that some of the reverse mortgage funds be placed in a set-aside to be used to cover future taxes and insurance.
In addition to closing costs, homeowners must pay property taxes and insurance, and costs to maintain the home.
What are the upfront and ongoing costs?
Reverse mortgages, like many financial products, have costs associated with them, including some that need to be paid up-front.
Costs may include:
Credit report fee: Verifies any federal tax liens, or other judgments, handed down against the borrower. Cost: generally between $20 to $50
Flood certification fee: Determines whether the property is located on a federally designated flood plan. Cost: generally about $20
Escrow, settlement or closing fee: Generally includes a title search and various other required closing services. Cost: can range between $150 to $800 depending on your location
Document preparation fee: Fee charged to prepare the final closing documents, including the mortgage note and other recordable items. Cost: $75 to $150
Recording fee. Fee charged to record the mortgage lien with the County Recorder’s Office. Cost: can range between $50 to $500 depending on your location
Courier fee. Covers the cost of any overnight mailing of documents between the lender and the title company or loan investor. Cost: generally under $50
Title insurance. Insurance that protects the lender (lender’s policy) or the buyer (owner’s policy) against any loss arising from disputes over ownership of property. Varies by size of the loan, though in general, the larger the loan amount, the higher the cost of the title insurance
Pest inspection. Determines whether the home is infested with any wood-destroying organisms, such as termites. Cost: generally under $100
Survey. Determines the official boundaries of the property. It’s typically ordered to make sure that any adjoining property has not inadvertently encroached on the reverse mortgage borrower’s property. Cost: generally under $250
Note: Cost estimates can change over time, and some of these costs may not be necessary.
Interest: Interest is charged each year just as with other mortgage products. On a traditional mortgage loan, interest along with principal is paid each month by the borrower until the loan is paid. With a reverse mortgage, the opposite occurs — the borrower receives principal each month (and pays no interest) until the loan is due and payable at which point the principal and the interest must be paid off.
MIP (mortgage insurance premiums): HECM reverse mortgage borrowers are charged MIP on an annual basis, however these fees accrue over time and are paid once the loan is due and payable. The annual mortgage insurance premium is 1.25 percent of the outstanding loan balance.
Responsibility for home costs: Continuing to pay property taxes, insurance, maintenance and other homeowner costs is required with a reverse mortgage loan. With the involvement of lienholder, the possibility of foreclosure exists if the borrower violates the terms of the mortgage such as by not paying property taxes or neglecting the property. Note: borrowers have a legal right and a window of time to cure a default to prevent or stop a foreclosure from the lender.
Interest payments on your loan are deferred to the end of the life of the loan.
What about interest payments?
Regarding interest rates, it depends on the program the person chooses. It could be fixed-rate program or an adjustable-rate program. Rates these days are hovering around 4% for the adjustable program and the fixed-rate program is hovering around 5%.
Your interest rate depends on a few factors:
- Your age
- Your home’s value
- Your property zip code
- Any existing mortgage balance or liens
- Number of expected years in the house
- Your life expectancy
Using this information, a reverse mortgage professional can help you figure out what your reverse mortgage interest rate will be.
As with most other loans and credit lines, reverse mortgage interest rates are charged on the funds that you receive from your loan. These charges are calculated daily and added to the loan balance monthly, and can be found on every borrower’s monthly statement.
The unique part about reverse mortgages is that interest payments on your loan are deferred to the end of the life of the loan: they are not paid up-front, out-of-pocket, or monthly. While most loans require monthly minimum payments to repay the loan balance and all associated interest charges over time, reverse mortgages defer all loan and interest repayment to when the loan matures. Reverse mortgage loan maturity events come about if:
- The home is sold
- All of the borrowers either move out of the home or pass away
- The loan goes into default through a borrower’s failure to pay taxes and insurance, or comply with all of the loan terms
With a reverse mortgage, you are charged interest only on the funds(loan proceeds) that you receive. For example, if you take your loan proceeds as a line of credit, you are only charged interest on the portion of the line of credit you have withdrawn.
The interest is compounded, which means you pay ongoing interest on the principal, plus accumulated interest.
Reverse mortgage products are available with both fixed interest rates and variable interest rates. The variable rate is tied to an index, such as the 1-Yr. Treasury bill or the 30-Day LIBOR (London Interbank Offered Rate), plus a margin determined by yield requirements in the financial markets. The margin is set at the time of loan origination and does not change over the life of the loan. During the life of your loan, the loan balance increases by the amount of compounded interest accrued.
Because there are no payments made by the borrower during the life of a reverse mortgage, interest is not paid on a current basis. It does not have to be paid out of your available loan proceeds either, but instead accrues, at a compounded rate, through the life of the loan until repayment occurs at the end.
Since 1996, CB Investments has helped countless seniors enjoy a stable and secure retirement. To date, our company has processed over $1.5 billion in loans. Our team of reverse mortgage professionals will assist and guide you through every step of the loan process and provide the necessary information to help you make an intelligent decision.
300 Pacific Coast Highway, Suite 301
Huntington Beach, CA 92648
© 2017 CB Investments, Inc.
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