We understand that you want to transition easily into the retirement lifestyle of your choice. Our experts at Cliffco Mortgage Bankers, your Long Island mortgage banker, are here to help you access a portion of your home’s equity and make the most of your retirement years with a Reverse Mortgage. We have put together this handy primer that outlines how a reverse mortgage works and answers some frequently asked questions.
What Is a Reverse Mortgage?
A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration (FHA) insured loan which enables you to access a portion of your home’s equity to obtain tax-free(1) funds without having to make monthly mortgage payments(2). If you are 62 years of age or older and have sufficient home equity, you may be able to get the cash you need to:
- Pay off your existing mortgage(3)
- Continue to live in your home and maintain the title
- Pay off medical bills, vehicle loans or other debts
- Improve your monthly cash flow
- Fund necessary home repairs or renovations
- Build a “safety net” for unplanned expenses
1. Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.
2. You must still live in the home as your primary residence, continue to pay required property taxes, homeowners insurance, and maintain the home according to FHA requirements.
3. Your current mortgage, if any, must be paid off using the proceeds from your HECM loan.
Eligibility for a Reverse Mortgage
Home equity conversion mortgage is a reverse mortgage. To be eligible for an HECM, the Federal Housing Administration (FHA) requires that all homeowners on the title be at least 62 years old. If there’s a mortgage balance, then it can be paid off completely with the proceeds of the reverse mortgage loan at the closing.
A reverse mortgage cannot be outlived. As long as at least one homeowner lives in the home as their primary residence and maintains the home in accordance with FHA requirements (keeping taxes and insurance current), the loan dues will not become due.
In the event of death or in the event that the home ceases to be the primary residence for more than 12 months, the homeowner’s estate can choose to repay the reverse mortgage or put the home up for sale. If the equity in the home is higher than the balance of the loan, the remaining equity belongs to the estate. If the sale of the home is not enough to pay off the reverse mortgage, the lender must take a loss and request reimbursement from the FHA. No other assets are affected by a reverse mortgage. For example, investments, second homes, care and other valuable possessions cannot be taken from the estate to pay off the reverse mortgage.
How Much Do I Qualify for with a Reverse Mortgage?
The amount that is available generally depends on four factors: age, current interest rate, appraised value of the home and government-imposed lending limits. Your Cliffco reverse mortgage consultant can tell you exactly how much money for which you qualify!
Distribution of Proceeds from a Reverse Mortgage
There are several ways to receive the proceeds from a reverse mortgage:
- Lump sum: A lump sum of cash at closing.
- Tenure: Equal monthly payments as long as the homeowner lives in the home.
- Term: Equal monthly payments for a fixed number of years.
- Line of Credit: Draw any amount at any time until the line of credit is exhausted.
- Any combination of those listed above.
Features of Reverse Mortgages
- With a reverse mortgage, you always retain title to or ownership of your home. The lender never, at any point, owns the home even after the last surviving spouse permanently vacates the property.
- Fees can be paid out of the loan proceeds. This means you incur very little out-of-pocket expense to get a reverse mortgage. Your only out-of-pocket expense is the appraisal fee and maybe a charge for counseling depending on the counseling organization with which you work. Together, these two fees will total a few hundred dollars. Very low-income homeowners may be exempt from being charged for counseling.
- With a home equity conversion mortgage (HECM), which is a government-insured reverse mortgage option, you never have to pay more than the appraised value of the home or the sale price no matter how large the loan balance may be. This feature is referred to as non-recourse. If the loan balance exceeds the appraised value of the home, then the federal government will then absorb that loss. The government pays for it with proceeds from its insurance fund, which you as a borrower pay into on a monthly basis.
Can I Qualify for FHA’s HECM Reverse Mortgage?
To be eligible for a FHA HECM, the FHA requires that you be a homeowner 62 years of age or older, you must own a home, have equity in your home and must live in the home.
Do I Remain on the Title of My Home?
Yes, you absolutely remain on title of your home. The title is NEVER negotiable.
What’s the Difference between a Reverse Mortgage and a Bank Home Equity Loan?
With a traditional second mortgage or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan and you are required to make monthly mortgage payments. The reverse mortgage is different in that it pays you and is available regardless of your current income or credit qualifications. The amount you can borrow depends on your age, the current interest rate and the appraised value of your home, sales price or FHA’s mortgage limits, whichever is less. Generally the more valuable your home is, the older you are and the lower interest, the more money for which you may qualify.
With a HECM you don’t make a monthly mortgage payment, but instead the lender pays you according to the payment plan you select. Like all homeowners you’re still required to pay your real estate taxes, insurance and other conventional payments such as utilities. With an FHA HECM, you cannot be foreclosed or forced to vacate your house because you “missed your mortgage payment.”
When Does My Loan Become Due and Payable?
An HECM loan must be repaid in full if you pass away or when you sell the home. The loan also becomes due and is payable if:
- You do not pay property taxes or hazard insurance or violate other obligations.
- You permanently move to a new principal residence.
- You or the last borrower fail to live in the home for 12-months in a row. An example of this situation would be if you (or the last borrower) were to have a 12-month or longer stay in a nursing home.
- You allow the property to deteriorate and do not make the necessary repairs.
To get started today on a reverse mortgage, contact our Cliffco Mortgage Bankers loan specialists at (516) 408-7300 or email email@example.com. We look forward to hearing from you!