Is it expensive?
Not necessarily. The majority of closing costs and fees can be financed into the reverse mortgage loan. In comparison to selling your home and moving, a reverse mortgage loan may provide a more cost efficient option by allowing the homeowner to access a portion of their home equity.
When does it have to be paid back?
The loan becomes due when all of the homeowners have passed away or have permanently moved out of the property, provided that taxes and insurance are paid and the home is maintained according to Federal Housing Administration (FHA) standards.
Why are there no monthly mortgage payments?
There are no monthly mortgage payments because any existing mortgage is paid off at closing using the proceeds from the reverse mortgage loan.
Are there limits on how I can use the money?
No. The funds can be used without restriction. However, there is one exception. The borrower may be required to set aside additional funds from the loan proceeds to pay for taxes and insurance.
Does obtaining a reverse mortgage mean the bank owns the home?
No, banks and other lenders are interested in originating loans and earning interest. Rather than owning the home, the bank or lender adds a lien in the form of a reverse mortgage loan onto the title so they can eventually collect the amount loaned plus interest.
Will the estate inherit the home?
The estate does inherit the home, but there will be a lien on the title. If your heirs wish to retain the property, then the full amount of the loan must be paid regardless of property value. The amount due at loan maturity is the principal borrowed plus any accrued interest and mortgage insurance premium.
For example, if someone with a $250,000 home passes away and leaves a reverse mortgage loan balance of $80,000, then the estate would sell the home for $250,000, repay $80,000 to the bank, and keep the $170,000 difference.
As a non-recourse loan, lenders can only look to the value of the home for repayment; no other assets may be attached if the loan balance grows beyond the mortgaged home value. You or your heirs will not be required to pay more than the value of your home at the time the loan is repaid; even if your loan balance exceeds the value of your home provided you or your heirs decide to sell the home.
Can the homeowner get forced out of the home?
The FHA reverse mortgage loan exists to help the homeowner to stay in their home. The loan typically does not become due, as long as the borrower meets the loan obligations. For example, the homeowner must reside in the home as their primary residence, pay their property and homeowners insurance and maintain the home according to FHA guidelines. In the event the borrower does not adhere to these responsibilities, HUD guidelines may require the servicer to initiate foreclosure proceedings.
Will Social Security or Medicare be affected?
Entitlement programs like Social Security and Medicare typically are not affected. However, need-based programs like Medicaid can be affected. You should consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.
Are taxes owed on a reverse mortgage?
Loan proceeds are not considered income and are not taxable; however you must continue to pay property taxes. Consult a tax advisor for more information.
Is it similar to a home equity loan?
A home equity loan and a reverse mortgage loan both use the home’s equity as collateral.
Any homeowner can apply for a home equity loan. A homeowner must be at least 62 years old to apply for a reverse mortgage loan.
A home equity loan typically must be repaid over 5 or 10 years. A reverse mortgage loan is generally not repaid until the homeowner passes away or permanently moves out of the home for 12 consecutive months.
Reverse mortgage loan interest rates are comparable to home equity loan rates. Although reverse mortgage closing costs are generally higher than a home equity loan, typically the closing costs can be financed as part of the reverse mortgage loan.
I live with my parents who have a reverse mortgage loan. What should I do when they pass away?
It is important that you contact the servicer of the loan to notify them that the borrower(s) have passed away. The servicers contact information can be found on the monthly statement. Let the servicer know the situation and they will guide you on the next steps and what you (the heirs) will need to do next.