A reverse mortgage does NOT require repayment as long as the home is your principal residence. A reverse mortgage is a loan against your home that requires no repayment for as long as you live there.
This is how it works
A reverse mortgage, like a traditional mortgage, is a loan made by a lender (usually a bank) to a homeowner using the home as security or collateral.
In a traditional mortgage, the bank will lend up to 90% of the property's value to the homeowner and expects that the homeowner will use their income to pay down the debt over time. With a reverse mortgage, the bank loans less (usually 60%) and expects that the reverse mortgage balance will grow over time because the homeowner is not making payments.
A reverse mortgage does not require repayment until the last homeowner has passed away or moved out of the property. Consequently, life expectancy is a huge part of the bank's calculation of how much to lend. That is why a 62 year old can borrow a substantially lower percentage of their property's value than an 80 year old.
Five payment plans:
You can select from five payment plans with your HECM reverse mortgage:
Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
Term - equal monthly payments for a fixed period of months selected.
Line of Credit - unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
Modified Tenure - combination of line of credit plus scheduled monthly payments for as long as you remain in the home.
Modified Term - combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.
You can change your payment options for a fee of $20.
Example scenario
A 70-year old single man owns a $200,000 property
He is eligible for $120,000 from a reverse mortgage
He wants to take out $40,000 initially (including fees) and then $5,000 per year for the next nine years.
When he passes away, his heirs intend to sell the property
After ten years, the homeowner has passed away and the estate inherits the property.
The homeowner spent $85,000 in proceeds from the reverse mortgage
Total accumulated interest over the life of the loan was $38,045
The estate sell the home for $200,000
The estate uses the proceeds of the sale to repay the reverse mortgage balance of $123,045
The estate inherits a net amount of $76,955
Three most significant closing costs
The three most significant closing costs are the 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.
Mortgage insurance
The initial insurance premium is 2% of the home's value. The insurance purchases three benefits:
The homeowner can not "outlive" the loan
The estate will not be liable if the payoff balance exceeds the home's value ("upside-down")
The FHA will pay out loan proceeds if the lender can not
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.
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.
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.
Interest rate and servicing fee
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.
The interest rate on adjustable reverse mortgages has remained betwen 3% and 5% over the last ten years.
Servicing Fee
Lenders or their agents provide servicing throughout the life of the reverse mortgage. Servicing includes sending you account statements, disbursing loan proceeds and making certain that you keep up with loan requirements such as paying taxes and insurance. Lenders may charge a monthly servicing fee of no more than $30 if the loan has an annually adjusting interest rate and $35 if the interest rate adjusts monthly. At loan origination, lenders set aside the servicing fee and deduct the fee from your available funds. Each month the monthly servicing fee is added to your loan balance.
Repaying a reverse mortgage
A reverse mortgaeg loan must be repaid in full when you die or sell the home. The loan also becomes due and 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.