How a Reverse Mortgage Loan Works
Making the most of your retirement. You’ve worked hard all your life. Now it’s time for all the love and money you’ve invested into your home to start paying you back. Many homeowners are taking advantage of a reverse mortgage to supplement their retirement. It’s not only flexible; it also offers security and predictability in today’s challenging economy. A reverse mortgage loan may be the ideal solution for you. What is a reverse mortgage? A reverse mortgage is a loan that allows homeowners age 62 and older to access a portion of their home equity and convert it into tax-free retirement funds.
The federal government has put in place several safeguards in the reverse mortgage loan program to protect and shield homeowners from predatory lending practices. Chief among them is the mandate that a third-party counseling session must occur with an independent HUD-approved counselor before an application can be processed
Established by Congress over twenty years ago, reverse mortgage loans are still a fairly new family of financial products. Though most seniors and retirees are familiar with reverse mortgages, a great many myths still exist that cloud the important and relevant facts. The list below will help you dispel the common misconceptions about reverse mortgage loans.
Common Reverse Mortgage Misconceptions:
When you obtain a reverse mortgage loan; the bank owns your home.
False: You will maintain the title as long as you live in your home, keep it maintained according to FHA requirements, and pay your property taxes and homeowners insurance.
Reverse mortgage loans are very risky.
False: Reverse mortgage loans are widely regarded as a safe financial product. The federal government has placed strict regulations and safeguards on reverse mortgage loans to protect seniors. Additionally, the National Reverse Mortgage Lenders Association (NRMLA) was created to develop and promote best practices in the Reverse Mortgage industry. Pacific Home Reverse Morgage, is a member of NRMLA and strictly adheres to its Code of Ethics and Professional Responsibility.
Your home must be paid off to qualify for a reverse mortgage loan.
False: As long as there is sufficient equity in your home, you may be eligible for a reverse mortgage loan, even if you still owe money on your existing mortgage. However, the existing mortgage balance must be paid off at closing. You may be able to use the funds from your reverse mortgage loan, or another source to pay off that balance.
You could end up owing more than your home is worth when it is sold.
False: You or your heirs will not be required to repay more than the value of your home at the time of sale to repay the loan even if your loan balance exceeds the sales proceeds.
Reverse mortgage loan proceeds are taxable and will affect your Social Security and Medicare.
False: Reverse mortgage loan proceeds are not taxable because the IRS does not consider them as income. In addition, a reverse mortgage loan will generally not affect regular Social Security payments or Medicare benefits. However, certain need-based government aid programs, such as Supplemental Security Income (SSI) and Medicaid, may be affected. We recommend you consult with a qualified professional to determine the specific rules.
The bank takes your home upon your death leaving nothing for your heirs.
False: A reverse mortgage loan functions like any other mortgage with a lien placed on the property. When the loan becomes due it must be paid. Generally, you can pay off the loan balance two ways: You or your heirs can sell the home and use the proceeds or use other sources to repay the loan.
There are restrictions on how you can use the money.
False: You can use the net proceeds of your reverse mortgage loan funds however you see fit. However, if your home is in need of FHA-required repairs or you have an existing lien, judgment, or taxes that are due, those must be satisfied, either through the reverse mortgage loan proceeds or prior to obtaining a reverse mortgage loan. Whatever your circumstance, we recommend that you speak to a financial advisor.
Benefits of a Reverse Mortgage Loan.
A reverse mortgage loan through Pacific Home Reverse Morgage gives you the ability to enjoy financial security, peace of mind and the ability to remain in your home during your retirement years.
You have the freedom to use the net proceeds however you want.*
Supplement your retirement income
Pay for medical care, prescription drugs and in-home care
Cover large or unexpected expenses
Make home improvements
Modify your home for better accessibility
Travel to visit family and friends or take vacations
Contribute to your grandchildren’s college education
Buy that new car you need or want
Gifts for the children/grandchildren
Live a more comfortable lifestyle
*If your home is in need of FHA-required repairs or you have an existing lien, judgment, or taxes that are due, those must be satisfied, either through the reverse mortgage loan proceeds or prior to obtaining a reverse mortgage loan.
Is a Reverse Mortgage Loan Right for Me?
It’s important to do your research and discuss your options with family members. In doing so, you may decide a reverse mortgage loan isn’t quite right for you. Here are some reasons why a reverse mortgage loan may not fit your needs:
You don’t intend to stay in your home for more than a few years
You plan on leaving your home to your heirs, and they will not or cannot pay back the loan with other funds or financing
Alternatives to Consider
Mortgage refinancing: Refinancing your existing mortgage may lower your monthly payments. It may allow you to pay off your mortgage faster and receive cash out of the equity in your property.
Home equity loan or line of credit: These products borrow against the value of your home. A loan is distributed and you will receive a lump sum or a line of credit to be drawn upon as needed.
Personal loan: Personal loans typically have higher interest rates than other types of financing options. They also may be unsecured, meaning no collateral is required.
Using a Reverse Mortgage Loan to Purchase a Home
Reverse mortgage loans are a great way to turn the equity in your home into tax free cash – without having to make monthly loan payments. Recent changes by Congress to the FHA-insured Reverse Mortgage Loan program now allow homeowners to buy a home with a reverse mortgage loan.
Although this sounds too good to be true, Americans 62 years and older can use the equity from the sale of their previous home, or other cash or savings, to move into a different home – with a single down payment. With a reverse mortgage loan you don’t make loan payments, because the loan is not due as long as you live in your home as your principal residence and you maintain it according to FHA requirements. As with all mortgage loans, you are required to pay your property taxes and homeowners insurance. Imagine the financial independence you can achieve by eliminating your mortgage payment once and for all. Best of all, if the untapped equity in your home increases over time, you or your heirs still “own” that equity – not the bank.
The Reverse Mortgage Loan Home Purchase Process
Purchasing a home with a reverse mortgage loan is very similar to purchasing a home with a conventional mortgage, with two minor exceptions. Rather than determining a down payment based solely on the purchase price, the minimum down payment will be based on a factor of your age, interest rates, and the lesser of the home’s appraised value, purchase price, or FHA national lending limit. Once an offer is accepted, your Reverse Mortgage Advisor will work with the seller or seller’s agent to open escrow with a title or escrow agency familiar with reverse mortgage loans. In some instances, a conventional title company will be able to conduct reverse mortgage loan transactions – your Reverse Mortgage Advisor will be able to determine which title companies can do this for you. Reverse Mortgage appraisals, inspections, contingencies, documents, and closings are virtually the same as those with a conventional mortgage. Due to the required HUD-approved independent counseling session, some reverse mortgage loan escrow periods may be slightly longer than that of a conventional mortgage.
The basic eligibility requirements to purchase a home with a reverse mortgage loan are:
All titleholders must be aged 62 years or over
The purchased home must be your principal residence
Must meet financial eligibility criteria as established by HUD
The purchased home must meet HUD’s minimum property standards and be either a single-family residence or a residence in a 2 to 4 unit dwelling.
The down payment must be from qualifying sources
You must complete a HUD-approved counseling session
Calculating the Minimum Down Payment
Since the funds available from a reverse mortgage loan are dependent on a number of factors, there is no single “rule of thumb” to determine the minimum down payment amount. The calculation to determine how much is available is based on the following:
The age of the youngest borrower on the title
Current interest rates
The lesser of the home’s appraised value, purchase price, or FHA national lending limit
The borrower may need to set aside additional funds from the loan proceeds for taxes and insurance
The older the borrower, the less will be required for the down payment. Based on current interest rates, a 65 year old borrower would typically need a down payment of roughly 35%-40% of the purchase price of the home.
* Some exceptions may apply