Reverse mortgages offer seniors (62 years and older) the opportunity to turn some of their home equity (the amount your property is worth today minus the amount you owe on your mortgage and any home equity loan or line of credit) into cash. The amount of available cash depends on current interest rates, the age of the youngest borrower, and the appraised home value. Typically, older borrowers with high valued homes are eligible to borrow the most. Regardless of the amount, money received can be used however the borrower chooses. You can say its purpose is to meet retirement expenses or improve lifestyle without having to leave home.
You don’t have to pay back the loan while you or an eligible spouse live in the home, but you still have to pay taxes, insurance, and maintain the home. When both you and any eligible spouse have passed away or moved out of the home, the loan must be paid off. This is usually done by selling the home. Keep in mind, you never owe more than the home is worth. So, your heirs do not have to worry about covering costs.
That said, there are qualifications that must be met in order to receive reverse mortgage funds.
If qualifications are met, a borrower can begin further discussing eligibility, mandatory counseling, application, loan processing, underwriting, and closing.
Counseling is required for all reverse mortgages. This is because seniors are often on a fixed income. And since it involves such a valuable asset and investment — your home — it is crucial guidance is provided by a third-party, Department of Housing and Urban Development (HUD) counselor.
The counselor will further explain the reverse mortgage program including costs and alternative options. They will even review loan comparisons provided to you by lenders. However, they will not advise you on which program to select. Instead, they will provide clarity and more information so you can make a better-educated decision.
Upon completion, the homeowner must provide the lender with a copy of their reverse mortgage counseling certificate.
If you choose to move forward with a reverse mortgage, it becomes time to choose a lender. Expect to provide personal information and financial statements. Lenders will examine all of your income sources including pensions and retirement plans, not to mention your credit history. They do this to ensure you can keep up with property taxes and insurance, a key component of borrower obligations.
You’ll also go over fees and closing costs. Expect to pay an origination fee, mortgage insurance premium, appraisal fee, title insurance, etc. — many of these fees were charged when you originally took out a mortgage.
At any time during the application process, you are able to change your mind without repercussion. Remember to ask questions as they come up and to read through paperwork and disclosures.
Once the application is complete, you can begin the appraisal, processing, and underwriting stages — getting you one step closer to funding. Underwriting is a key stage as it involves verifying all information to ensure the loan is compliant and meets all guidelines of the HUD/FHA guidelines. Once approved in underwriting, your mortgage consultant can move forward with arranging your closing process.
During the closing process, you will carefully review and sign all the loan documents to make sure that the interest rates, fees, and proceeds are as discussed. Once this is complete, and the three day right of rescission has passed, you can receive your reverse mortgage funds.
Note: the three day right of rescission is your final chance to cancel the loan. Be sure to ask your lender for instructions on this process.
Otherwise, funds can be received in one lump sum, as fixed monthly payments (paid out the first of each month), or can be used to pay off your current mortgage debt. The disbursement of funds is often decided during the application process.
You can pay for most of the costs of a reverse mortgage by financing them and having them paid from the proceeds of the loan. Financing the costs means that you do not have to pay for them out of your pocket. On the other hand, financing the costs reduces the net loan amount available to you.
Fees and charges include:
The lender will discuss which fees and charges are mandatory. You will be charged an initial mortgage insurance premium (MIP) at closing. The rate is dependent on your disbursements. Over the life of the loan, you will also be charged an annual MIP.
In 2017, HUD (under the Trump Administration) determined changes are necessary to improve the financial health of the federally insured reverse mortgage program, which has suffered losses in recent years. Changes include raising premiums and tightening loan limits. The changes — implemented October 2 — apply to borrowers who take out new reverse mortgage loans (current borrowers will not be affected).
These changes can be somewhat complicated to explain and vary person to person. So it’s imperative you speak to a reverse mortgage expert to better understand how this may affect your loan.
If you or a loved one are curious about a reverse mortgage and its financial benefits, make the call to one of our salary-based mortgage consultants. We can guide you through what to expect and can help you better understand if it’s the right fit for your future.