About Face – How Reverses Work

A reverse mortgage enables older homeowners (62+) to convert part of the equity in their homes into tax-free income without having to sell their home, give up title, or take on a new monthly mortgage payment. The reverse mortgage is aptly named because the payment stream is “reversed.”  Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you.

Unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence and may be repaid at any point without incurring penalties or additional fees.

Reverse mortgages are probably best understood when compared side-by-side with a traditional home mortgage, otherwise known as a "forward" mortgage. The following table shows the differences between the two mortgages:

As you can see, both loans incur debt against your home and both affect equity, but they do so in very different ways. For a traditional home mortgage, you would be making monthly payments to a lender. With a reverse mortgage, they will make the payments to you. In essence, the two loans work the complete opposite of one another.

Advantages of Moving in Reverse

A reverse mortgage can help you gain financial independence and maintain an adequate standard of living all without having to leave your current home. In addition to this, the money you receive from a reverse mortgage is tax-free and may be used for a variety of purposes. Besides the traditional uses of a loan, such as paying off old debt or making home improvements, here are some other ways borrowers are utilizing their tax-free income: 

  - Traveling and taking vacations 
  - Obtaining in-home health care 
  - Paying for prescription medications 
  - Supplementing retirement 
  - Purchasing an annuity 
  - Paying for grandchildren's educational expenses 

However you choose to use the income, reverse mortgages provide you with the freedom to do so without added financial stress.  For seniors and maturing Baby Boomers, the idea of staying put while collecting monthly advances can be very attractive. Many of them have no desire to relocate. Instead, they prefer cash advances to pay off debts, improve and repair their homes, or travel the world.


Should I Stay or Should I Go?

Most homeowners generally choose reverse mortgages so that they can remain in their current homes. The best way to decide if a reverse mortgage is for you is to compare it to the alternative of selling your home. When you make this evaluation, ask yourself these three questions: 

  1. How much cash can I get by selling my home and will that amount sustain me for the rest of my life?
  2. How much will it cost to buy or rent a new place?
  3. Is it worth the move at this point in my life, or are there other things I’d prefer to do with the money?


How Would You Like Your Money?

The amount of money you receive from a reverse mortgage will depend on several things including the plan you select, the type of cash advances you choose, your age, and the value of your home. Typically, the older you are, the more equity you will have in your home. This is why more mature borrowers typically receive greater loan amounts. There are several ways that you can receive money from a reverse mortgage. Some programs may even allow you to combine the choices. Here is a list of five different options to choose from: 
 
Tenure – Equal monthly payments as long as at least one borrower is living and continues to occupy the property as a principal residence. 

Term – Equal monthly payments for the fixed period of months you have selected. 

Line of Credit – This would be used in the same way as a credit card or checkbook. You would receive unscheduled payments or installments at the times and amounts you have selected. This will continue until the line of credit is exhausted. 

Modified Tenure – A combination of a line of credit and monthly payments for as long as you continue to live in the home. 

Modified Term – This combination of a credit line and monthly payments differs from the plan above in that it is based upon a fixed period of months that you have chosen.


What Does a Reverse Mortgage Cost?

In addition to not having any payments or having to qualify for the loan, reverse mortgage interest rates are typically lower than those for traditional home equity loans. This is another valuable benefit for those considering a reverse mortgage. The loan fees and costs incurred in obtaining a reverse mortgage can typically be offset by the money you receive from the loan. These costs will be added to the balance of the loan and must be repaid with interest once the loan terminates.

Total Annual Loan Cost (TALC)
In order for borrowers to gain a better understanding of the true cost of reverse mortgages, the federal Truth-in-Lending (TIL) law requires lenders to disclose what they call a "Total Annual Loan Cost" for the loan, also known as TALC. TALC displays the total transaction cost over the life of the loan. This makes seniors fully aware of the cost of incurring the loan. The TALC is also extremely helpful when comparing various types of reverse mortgages.

Debt Limit
Reverse mortgage debt is determined by adding all of the loan advances (this includes those used to pay off prior debt or finance the loan costs) plus the interest on your loan balance. In the end, if that total amount equals less than the value of your home when you repay the loan, then you will end up keeping the remaining amount. Should the balance of your loan ever grow to equal or exceed what your home is worth, then your total debt will be limited by that value; you can never be required to repay more than what your home is worth when the loan comes due. That simply means if today's lofty housing prices start to decline, you won't be responsible for paying back a larger amount.

Repayment
Reverse mortgages do not require any payment as long as the borrower(s) remain in the home. Should the borrower(s) become deceased, sell the home, or relocate, then the loan will be due in full, along with interest and any additional costs. In the event there are two borrowers on the loan and one should pass away, the loan would not yet be due since one of the borrowers still occupies the house.


A Plan of a Lifetime - Types of Reverse Mortgage Plans

There are basically three different reverse mortgage plans being offered today: Uninsured, Lender-Insured and FHA-Insured.

Uninsured
This type of reverse mortgage differs dramatically from an FHA-Insured or Lender-Insured loan. With this plan, you will receive monthly loan advances for a fixed term only – the number of years you select when you first take out the loan. The second important difference to note with an uninsured loan is that it will be due on a specific date. This type of reverse mortgage is best suited for short term, substantial cash needs.

Lender-Insured
This type of reverse mortgage offers monthly loan advances with or without a line of credit, for as long as you live in your home. This type of plan typically offers larger loan amounts than an uninsured or FHA-Insured plan would. You may also be allowed to mortgage less than the full value of your home, thus preserving your equity for later use.

Home Equity Conversion Mortgage
The third and most common type of reverse mortgage is the Home Equity Conversion Mortgage, otherwise known as HECM. This is the only reverse mortgage program that is federally insured and backed by the U. S. Department of Housing and Urban Development (HUD).

Home Equity Conversion Mortgages have some very attractive features that make them a popular choice among borrowers. Here are a few:

Choose your own interest rate
The Home Equity Conversion Mortgage (HECM) is the only reverse mortgage that lets you choose your own interest rate. You can select one that changes annually or one that changes every month.

Several payment options
You may receive monthly loan advances for a fixed term or for as long as you live in the home. You may also choose to receive a line of credit, or you may combine monthly loan advances with a line of credit. An HECM also permits you to change your payment options at little cost.

Can be used for any purpose
Unlike many other reverse mortgages, a Home Equity Conversion Mortgage does not require a borrower to designate the loan to one specific use. Instead, you may apply the funds to anything you choose.

Protection
Most important of all, this plan protects you by guaranteeing continued loan advances even if your lender defaults.


Can the lender take my home away if I outlive the loan?
No! 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.

Will I still have an estate that I can leave to my 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 belongs to you or to your heirs. None of your other assets will be affected by a reverse mortgage loan. This debt will never be passed along to the estate or heirs.