A reverse mortgage is somewhat a counterintuitive term in that a homeowner can take out a reverse mortgage loan but not have to make any payments on the loan until the owner leaves the property. This is compared to a traditional “forward” mortgage where a loan is taken out and the owner makes regular monthly payments until the loan is retired, refinanced or sold. In today’s marketplace, the reverse mortgage is one overseen by the Federal Housing Administration, or FHA. The program is sometimes referred to by its proper name: The Home Equity Conversion Mortgage, or HECM (heck-um). Reverse mortgages are designed for seniors who may be “house rich” but cash poor. The other two ways to access the equity in the home without selling is with a home equity line of credit, or HELOC and with a cash-out refinance. With either, monthly payments must be made and when seniors retire, the less monthly debt the better.
Who is Eligible
Reverse mortgages are reserved for those who are at least 62 years of age. When there is more than one applicant, the youngest age of the applicant is used for qualification. This is important because one age is a consideration when determining how much equity is available for a reverse. The older the borrower, the more that can be accessed. Funds for a reverse can be delivered in one lump sum, as a line of credit or a combination of either. Both fixed-rate and adjustable-rate terms are available. There is very little in terms of qualification but the lender must determine the borrowers have enough money each month to take care of monthly living expenses, including property taxes and insurance. Reverse mortgage loans can only be used to finance an owner-occupied property and there can be no subordinate financing. If there is an existing loan on a property during the proceeds of a sale, the existing lien must be paid off first before any funds are disbursed to the borrowers.
Reverse Mortgage Benefits
As seniors age and get closer to retirement, they may decide it’s time to downsize and reduce their monthly living expenses. The days of raising a family and paying for college are long gone and it’s time to find a more comfortable, smaller place to live. Historically, this has been done by selling the current home and using the existing proceeds to buy a new one and get a new home loan. Yet this doesn’t address the new monthly payments needed for the retirement home.
A reverse mortgage can be used in this situation and doesn’t require any monthly payments. In this scenario, seniors can take out a reverse mortgage and use those funds to pay for their retirement home. Most HECM for purchase transactions cover most of the cost of the new property, with the buyers paying the balance from the sale of their previous home and/or cash from retirement and savings accounts. During this period of ownership, interest accrues on the outstanding reverse balance but is no payments are required. Instead, the reverse is paid off when the last owner leaves the house.
Not many loan officers are familiar with how to use a reverse mortgage to buy a home but it can be one of the best financial decisions one can make. Call me for details and also have a chat with your financial planner if you or someone you know can take advantage of a reverse mortgage for a purchase.