Reverse Mortgage Basics & Myths Revealed
- You CANNOT Lose Your Home
- The bank cannot take your home from you. So long as you keep the taxes and insurance current.
- You can never owe more than your home's value.
- Example: your home's value is $150,000. You get a reverse mortgage & the property value drops or never increases over the years, all the while your Reverse Mortgage balance increases above the home's value upon the homeowner's death or decides to sell the home. The existing loan balance is only satisfied as much of the home's actual value. The home value is $140,000 but the loan balance is $160,000 - doesn't matter.
- Your heirs will NOT have to repay more than what the home is worth.
- The bank does NOT own or take back the property.
- You CAN leave your home & estate to your children or heirs.
- When you sell your home or no longer use it for your primary residence, you or your estate will repay the cash you received from the reverse mortgage, plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs. None of your other assets will be affected by HUD's reverse mortgage loan. This debt will never be passed along to the estate or heirs.
- If one spouse passes away, the other spouse DOES remain in the home under the same conditions.
- No mortgage payments
- Continued monthly checks
- There are NO payments.
- You do not need to repay the loan as long as you or one of the borrowers continues to live in the house and keeps the taxes and insurance current. You can never owe more than your home's value.
- When Do I Pay Back My Loan?
- No monthly payments are due on a reverse mortgage while it is outstanding. The loan is repaid when you cease to occupy your home as a principal residence, whether you (the last remaining spouse, in cases of couples) pass away, sell the home, or permanently move out. The amount owed can never exceed the value of your home. Furthermore, if the home is sold and the sales proceeds exceed the amount owed on the reverse mortgage, the excess money goes to you or your estate.
- How Much Money Can I Get?
- The amount of funds you are eligible to receive depends on your age (or the age of the youngest spouse in the case of couples), the appraised home value, interest rates, and in the case of the government program, the lending limit in your area. In general, the older you are and the more valuable your home (and the less you owe on your home), the more money you can get.
- You CAN Use the Proceeds from a Reverse Mortgage for just about any purpose?
- The proceeds from a reverse mortgage can be used for anything, whether its to supplement retirement income to cover daily living expenses, repair or modify your home (i.e., widening halls or installing a ramp), pay for health care, pay off existing debts, buy a new car or take a "dream" vacation, cover property taxes, and prevent foreclosure.
- How Does the Interest Work on a Reverse Mortgage?
- With a reverse mortgage, you are charged interest only on the proceeds that you receive. Most reverse mortgages charge a variable interest rate (although fixed rate products are entering the marketplace) that is tied to an index, such as the 1-Yr. Treasury Bill or the London Interbank Offered Rate (LIBOR), plus a margin that typically adds an additional one to three percentage points onto the rate you're charged. Interest is not paid out of your available loan proceeds, but instead compounds over the life of the loan until repayment occurs.
- What Is the Service Fee Set-Aside?
- Under the FHA HECM program, you are charged a monthly servicing fee of $35 to manage your account once the loan closes. The SFSA is an estimate of what the total servicing fees will be over the life of the loan, by multiplying your life expectancy (converted from years into months) multiplied $35. Although it's not considered a closing cost, the SFSA can equal several thousand dollars, which is deducted from your available loan proceeds. You do not have access to that money, nor do you earn interest.
Will I Lose My Government Assistance If I Get a Reverse Mortgage?
A reverse mortgage does not affect regular Social Security or Medicare benefits. However, any reverse mortgage proceeds that you receive must be used immediately. Any funds that you retain would count as an asset and could impact Medicaid eligibility. For example, if you receive $4,000 in a lump sum for home repairs and spend it all the same calendar month, everything is fine. Any residual funds remaining in your bank account the following month would count as an asset. If the total liquid resources (including other bank funds and savings bonds) exceed $2,000 for an individual or $3,000 for a couple, you would be ineligible for Medicaid. To be safe, you should contact the local area agency on aging or a Medicaid expert.
When Do I Pay Back My Loan?
No monthly payments are due on a reverse mortgage while it is outstanding. The loan is repaid when you cease to occupy your home as a principal residence, whether you (the last remaining spouse, in cases of couples) pass away, sell the home, or permanently move out. The amount owed can never exceed the value of your home. Furthermore, if the home is sold and the sales proceeds exceed the amount owed on the reverse mortgage, the excess money goes to you or your estate.
What If I Sell The Home For Less Than The Loan Amount?
- YOU WIN! Well, actually it’s a draw. If you owe $300,000 in loan & fees, but you can only sell your home for $200,000, all you need to do is sell you home for the best possible price you can, and the lender has accept it as your loan repaymen
- What If I Have An Existing Mortgage?
- You may qualify for a reverse mortgage even if you still owe money on an existing mortgage. However, the reverse mortgage must be in a first lien position, so any existing mortgage must be paid off. You can pay off the existing mortgage with the reverse mortgage, or with savings.
- For example, let's say you owe $100,000 on an existing mortgage. Based on your age, home value, and interest rates, you qualify for $125,000 under the reverse mortgage program. Under this scenario, you will be able to pay off ALL of the existing mortgage and still have $25,000 left over to use as you wish.
- If, however, you only qualify for 85,000 then you would need to come up with $15,000 from your savings to get the reverse mortgage. Even then, all the money from the reverse mortgage will have been used to pay off the existing mortgage. On the other hand, you won't have a monthly mortgage payment.
FHA lending limit. is a number set by HUD each year—that varies by county—which limits the amount of home value that can be used to calculate loan advances from a reverse mortgage. The present limit (for 2008) is $362,790. If a home's value exceeds the county lending limit, then the computer calculates “as if” your home’s value is the county limit rather than its true market value.
Net principal limit is a number calculated by the computer that is equal to the amount of available loan proceeds after closing costs have been deducted.
Total Annual Loan Cost (or TALC) is the government’s way of telling a borrower that if you plan on staying in your home for a short period of time (2-3 years or less), then a reverse mortgage can be expensive, because the closing costs are being spread over a shorter period of time. In essence, the longer you live in your home, the cheaper a reverse mortgage becomes because the costs are being spread over a longer period.
Expected rate is an interest rate based on the 10-year Treasury Bond that helps calculate the amount of available loan proceeds from a reverse mortgage.
Credit line Growth – The unused balance in the line of credit grows. However, you are not earning interest. The growth factor is taking into consideration that your home has appreciated in value over the past 12 months and that you are one year older.