A reverse mortgage is a loan against your home that requires no repayment for as long as you live there. It is offered to homeowners ages 62 or older. It is different from other types of loans because the borrower does not make payments during the loan.

Reverse mortgages are most often used to pay for medical and daily living expenses. Homeowners who have an existing mortgage also use the reverse mortgage to fully pay off the existing mortgage and stop making monthly payments.

A reverse mortgage is basically a low-interest loan that uses a home's equity as collateral. The loan amount is a percentage of the property?s market value. That percentage is determined by the age of the homeowner based on life expectancy. The loan does not have to be repaid until one year after the last surviving homeowner moves out of the property or passes away. At that time, the estate typically sells the home to repay the balance of the reverse mortgage and the remaining equity is inherited. The estate is not responsible if the home sells for less than the payoff amount of the reverse mortgage.

Frequently asked questions:

• If someone is under 62 but they are on permanent disability, do they qualify?
  • No. The minimum age is 62 and there are no exceptions for disability or Social Security status.
• Can someone has a mortgage can they still get a reverse mortgage?
  • Yes. Many people who get a reverse mortgage use it to pay off their current mortgage and stop making payments.
• Does every homeowner over age 62 qualify?
  • No. Many people who want a reverse mortgage do not have enough equity in their home to qualify.
• What if there is too little home equity to qualify?
  • A "shortfall" means that the reverse mortgage would not generate enough proceeds to cover the existing mortgages on the home. In this situation, the homeowner can not get a reverse mortgage until the balance of their existing mortgage is lowered.

Reverse mortgage eligibility

To be eligible for a reverse mortgage, the homeowners be 62 or older. If there is a mortgage on the home, it can be paid off with the proceeds of the reverse mortgage. Income and credit score are not considered in a reverse mortgage application.

Eligible homes

Almost all homes are eligible, however, some types of properties have restrictions (mobile homes, manufactured homes, and co-ops).

Eligibility assessments

• Age of the homeowner
• Property's value
• Balance on existing mortgages
• Expected interest rate

Factors that do NOT affect reverse mortgage eligibility

• Income
• Credit score
• Bankruptcy
• Health of the homeowners

Home equity loans and traditional mortgages have strict requirements for income and creditworthiness because the homeowner must be able make payments to repay the loan. A reverse mortgage has no income or credit requirements because the homeowner receives instead of making payments.

The amount that can be borrowed from a reverse mortgage is set by an FHA formula that use age, interest rates, and the appraised value of the property. The older the homeowner, the lower the interest rate, and the more valuable the home, the higher the eligible amount will be.

As noted previously, with traditional loans the homeowner is required to make monthly payments. With a reverse mortgage the loan is not due for repayment for as long as at least one homeowner lives in the home. A critical point is that with a reverse mortgage a homeowner cannot be forced into foreclosure because of missed mortgage payments. However, the homeowner must stay current on real estate taxes, insurance, and maintenance.

Why choose reverse mortgages over home equity loans?

The similarity to a home equity loan is only that it uses the home as loan collateral.

• Any homeowner at any age can apply for a home equity loan. A homeowner who is at least 62 to apply for a reverse mortgage.
• A home equity loan requires disposable income and stable credit history. Income and credit are not considered in a reverse mortgage.
• A home equity loan must be repaid over 5 or 10 years. A reverse mortgage is not repaid until the homeowner passes away or permanently moves out.
• A home equity loan has few fees beyond interest. A reverse mortgage has closing costs and a somewhat lower interest rate.

Closing costs

The three most significant closing costs are the FHA mortgage insurance premium, origination fee, and title insurance. Almost all closing costs are financed into the loan, however the two costs that are often paid out of pocket are the counseling and appraisal.

Origination fee

The origination fee is the lender's fee. The fee is set by law according to the formula:

• Maximum of $6,000
• Minimum of $2,500
• Between the minimum and maximum, the amount is 2% of the first $200,000 of property value and 1% of $200,000 to $400,000 of value

Title fees

Title fees are the same for all types of mortgages.

Appraisal

The appraisal determines the market value of the property. A reverse mortgage appraisal has higher standards than a normal appraisal. It is conducted by an FHA-approved appraiser according to guidelines that require more documentation than a typical appraisal. An appraisal costs $400-500.

Interest

Interest accumulates on a reverse mortgage just like on a traditional mortgage. However, instead of paying down the balance, the loan balance gets larger over time. Most homeowners choose a fixed rate reverse mortgage rather than an adjustable rate.

Pros of reverse mortgages

• Provides monthly or lump sum income
• Homeowner stays in the home without making monthly payments
• Eliminates existing mortgages
• Simple qualification because credit and income are not considered
• Heirs are not responsible if payoff balance exceeds home value
• Heirs inherit remaining equity after paying off the reverse mortgage
• Proceeds are untaxed
• Interest rates are often lower than other options

Cons of reverse mortgages

• Value of estate inheritance decreases over time as proceeds are spent
• Fees are higher than a traditional mortgage
  • Initial mortgage insurance premium (2% of property value)
  • Ongoing mortgage insurance (0.5% of reverse mortgage balance)
  • Loan origination fee may be higher than for traditional mortgages
• Although Social Security and Medicare eligibility are not affected by a reverse mortgage, need-based government programs such as Medicaid can be affected if the amount of funds withdrawn from a reverse mortgage exceed the monthly income limits.
• Reverse mortgages are not well understood by many advisors.

The Home Equity Conversion Mortgage (HECM) is reverse mortgage program which enables you to withdraw some of the equity in your home. You choose how you want to withdraw your funds, whether in a fixed monthly amount or a line of credit or a combination of both.

You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.

Borrower Requirements

You must:

• Be 62 years of age or older
• Own the property outright or have a small mortgage balance
• Occupy the property as your principal residence
• Not be delinquent on any federal debt
• Participate in a consumer information session given by an approved HECM counselor

Mortgage Amount Based On

• Age of the youngest borrower
• Current interest rate
• Lesser of appraised value or the HECM FHA mortgage limit

Reverse mortgages can not be outlived. As long as one homeowner lives in the home (while staying current on taxes and insurance) then the loan is not due.

Inheritance

When the homeowner moves out or passes away, the estate choose to either repay the reverse mortgage or sell the home.

If the home sells for more than the balance of the reverse mortgage, the remaining equity passes to the heirs. If the home sells for less than the owed balance, the lender must take a loss and request reimbursement from the FHA.

A reverse mortgage is "non-recourse" meaning that no other assets are liable to repay it. For example, second homes, investments, and cash cannot be required from the estate to pay off the reverse mortgage.

Distribution of funds

The proceeds of a reverse mortgage are distributed in any combination of:

• Line of Credit ? draw as needed up to the maximum eligibility amount
• Lump sum - a lump sum of cash
• Tenure - monthly payments for an unlimited number of years
• Term - monthly payments for a specific number of years