Reverse Mortgage Basics: a New Kind of Loan

Reverse Mortgages allow you to"have your cake and eat it too"

You probably spent many years making payments and building equity in your home and you don't want to move, sell it or get another loan. But, you would like to enjoy a better lifestyle, or maybe you need money that you don't have. Reverse Mortgages allow you to "have your cake and eat it too", here's how:

Requirements to obtain a Reverse Mortgage:

Age 62 or older. There is no maximum age limit.
Have equity in your home. It does not have to be paid for.
There is no income, credit or medical requirements or checks
There is no upper limit on the value of your home.

The money you receive from a reverse mortgage will be tax-free and may be used for any purpose: travel, medicine, investment, monthly income, automobile, vacation home or anything else.

Some advantages of a Reverse Mortgage?

Converts your home equity into tax-free cash.
Frees up money to be used for any purpose you want.
No payments during your lifetime as long as you live in the home.
You will not have to move unless you voluntarily choose to do so.
The lender cannot take your home if you pay the taxes, keep it insured and maintain it: things you already do.
Your income and savings will not be reduced in any way.
Your money is available as a lump sum, monthly payments or a combination in most states.
The amount to be repaid can never exceed the value of your home but any excess goes to you or your estate.
You can repay the loan any time: it must be repaid at death or when you permanently move.
There are government guidelines that protect you from abuse.
A large and well-known financial institution is ready to help you get a Reverse Mortgage

If you're having trouble making ends meet or need money for other reasons, a Reverse Mortgage could be the answer.

A "reverse" mortgage is a loan against your home that you do not have to pay back for as long as you live there. With a reverse mortgage, you can turn the value of your home into cash without having to move or to repay the loan each month. The cash you get from a reverse mortgage can be paid to you in several ways:

All at once, in a single lump sum of cash;
As a regular monthly cash advance;
As a "creditline" account that lets you decide when and how much of your available cash is paid to you; or
As a combination of these payment methods.

No matter how this loan is paid out to you, you typically don't have to pay anything back until you die, sell your home, or permanently move out of your home. To be eligible for a reverse mortgage, you must own your home and be 62 years of age or older.

Other Home Loans

To qualify for most loans, the lender checks your income to see how much you can afford to pay back each month. But with a reverse mortgage, you don't have to make monthly repayments. So you don't need a minimum amount of income to qualify for a reverse mortgage. You could have no income and still be able to get a reverse mortgage.

With most home loans, you could lose your home if you don't make your monthly payments. But with a reverse mortgage, there aren't any monthly repayments to make. So you can't lose your home by not making them. Most reverse mortgages require no repayment for as long as you - or any co-owner(s) - live in the home. So they differ from other home loans in these important ways:

You don't need an income to qualify for a reverse mortgage; and
You don't have to make monthly repayments on a reverse mortgage.

"Forward" Mortgages

You can see how a reverse mortgage works by comparing it to a "forward" mortgage - the kind you use to buy a home. Both types of mortgages create debt against your home. And both affect how much equity or ownership value you have in your home. But they do so in opposite ways.

"Debt" is the amount of money you owe a lender. It includes cash advances made to you or for your benefit, plus interest. "Home equity" means the value of your home (what it would sell for) minus any debt against it. For example, if your home is worth $150,000 and you still owe $30,000 on your mortgage, your home equity is $120,000.

Falling Debt, Rising Equity

When you purchased your home, you probably made a small down payment and borrowed the rest of the money you needed to buy it. Then you paid back your traditional "forward" mortgage loan every month over many years. During that time:

Your debt decreased; and
Your home equity increased.

As you made each repayment, the amount you owed (your debt or "loan balance") grew smaller. But your ownership value (your "equity") grew larger. If you eventually made a final mortgage payment, you then owed nothing, and your home equity equaled the value of your home. In short, your forward mortgage was a "falling debt, rising equity" type of deal.

Rising Debt, Falling Equity

Reverse mortgages have a different purpose than forward mortgages do. With a forward mortgage, you use your income to repay debt, and this builds up equity in your home. But with a reverse mortgage, you are taking the equity out in cash. So with a reverse mortgage:

Your debt increases; and
Your home equity decreases.

It's just the opposite, or reverse, of a forward mortgage. With a reverse mortgage, the lender sends you cash, and you make no repayments. So the amount you owe (your debt) gets larger as you get more and more cash and more interest is added to your loan balance. As your debt grows, your equity shrinks, unless your home's value is growing at a high rate.

When a reverse mortgage becomes due and payable, you may owe a lot of money and your equity may be very small. If you have the loan for a long time, or if your home's value decreases, there may not be any equity left at the end of the loan.

In short, a reverse mortgage is a "rising debt, falling equity" type of deal. But that is exactly what informed reverse mortgage borrowers want: to "spend down" their home equity while they live in their homes, without having to make monthly loan repayments. There's more about this important concept in an article called "A 'Rising Debt' Loan" in the Basics section of this site.

Exception

Reverse mortgages don't always have rising debt and falling equity. If a home's value grows rapidly, your equity could increase over time. Or, if you only get one loan advance and no interest is charged on it, your debt would never change. So your equity would grow as your home's value increases. But most home values don't grow at consistently high rates, and interest is charged on most mortgages. So the majority of reverse mortgages end up being "rising debt, falling equity" loans.

Federally-Insured Loans

Eligibility & Repayment

The Home Equity Conversion Mortgage (HECM) is the only reverse mortgage insured by the federal government. HECM loans are insured by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD).

The FHA tells HECM lenders how much they can lend you, based on your age and your home's value. The HECM program limits your loan costs, and the FHA guarantees that lenders will meet their obligations.

HECMs Versus Other Reverses

HECM loans generally provide the largest loan advances of any reverse mortgage. Often they provide a lot more cash than any other program. HECMs also give you the most choices in how you can have the cash paid to you.

The money you get from a HECM can be used for any purpose. Although they are not cheap, HECM loans can be much less costly than the other reverse mortgages that can be used for any purpose.

Generally, the only reverse mortgages that cost less than HECMs are ones offered by state or local governments. These loans typically must be used for one specific purpose only, for example, to repair your home, or pay your property taxes. They also generally are available only to homeowners with low to moderate incomes.

Who is Eligible

HECM loans are available in all 50 states, the District of Columbia , and Puerto Rico . (In Texas ,
however, HECM creditline options are not available.) To be eligible for a HECM loan:

you, and any other current owners of your home, must be aged 62 or over, and live in your
home as a principal residence;
your home must be a single-family residence in a 1- to 4-unit dwelling, a condominium,
or part of a planned unit development (PUD). Some manufactured housing is eligible, but
cooperatives and most mobile homes are not;
your home must be at least one year old and meet HUD's minimum property standards,
but you can use the HECM to pay for repairs that may be required; and
you must discuss the program with a counselor from a HUD-approved counseling agency.

Repaying a HECM

As with most reverse mortgages, you must repay a HECM loan in full when the last surviving borrower
dies or sells the home. It also may become due if:

you allow the property to deteriorate, except for reasonable wear and tear, and you fail to
correct the problem; or
all borrowers permanently move to a new principal residence; or
the last surviving borrower fails to live in the home for 12 months in a row because of
physical or mental illness; or
you fail to pay property taxes or hazard insurance, or violate any other borrower obligation.

Other Choices

Seriously Consider Selling

Many homeowners become interested in reverse mortgages so they can stay in their own homes. Selling their homes and moving elsewhere are generally not very appealing to most older people.

The single best way to evaluate a reverse mortgage is to compare it to what may be your only real option: selling your home and using the proceeds to buy or rent a new home. Do you know:

How much cash you could get by selling your home?
What it would cost you to buy (and maintain) or rent a new home?
How much money you could safely earn on any money left over after you buy a new home?
Have you recently looked into buying a less costly home, renting an apartment, or moving into assisted living or other alternative housing?

Until you have seen and considered other housing options, how do you know that another housing choice wouldn't be better for you than a reverse mortgage? For your own peace of mind, look into what else might be available. It doesn't hurt to explore all your options before making a decision.

Most likely you will come to one of two conclusions:

You may find another housing option that is a lot more attractive than you thought; or
You may confirm what you were fairly certain of all along: that where you live now is the best place for you to be.

No matter what you conclude, you will have a much better idea of the overall costs—and benefits—of staying versus moving. That will give you a better sense of what is most important to you. And then it should be easier for you to evaluate the costs and benefits of a reverse mortgage.