Reverse Mortgages

Reverse Mortgage details explained by the Equity Funding Resources Team at 571-291-4913

Reverse mortgages provide financial security and independence.  Many older homeowners are now taking advantage of these programs, the most popular of which is backed by the United States Department of Housing and Urban Development (HUD).

Some of the features of reverse mortgages include:

Common uses of reverse mortgage proceeds include:

How Reverse Mortgages Work


Reverse mortgages help homeowners to convert their home equity into cash without having to sell their home or incur monthly mortgage payments.   They are home loans, similar to regular home loans in most respects.  Title to the home remains with the homeowners, and the reverse mortgage is attached to the home like a regular home loan. 

The main difference between reverse mortgages and regular home loans is that they don’t need to be repaid as long as one homeowner remains living there.  This is because monthly interest charges are added to the loan balance, and collected at the end of the loan rather than every month.  Interest is only charged on the amount used (like a credit card or home equity line of credit). 

Reverse mortgage proceeds must first be used to pay off any existing mortgages and liens, and complete any required home repairs.  The remaining amount may be accessed anytime the homeowner chooses, or the homeowner may elect to automatically receive cash every month for life.

If the homeowners remain in their home for the rest of their lives, when the last homeowner passes away the home goes to their heirs, just like it would if there were no reverse mortgage.  The outstanding loan balance must be repaid at that time.  There are no prepayment penalties or hidden charges.  The heirs may either sell the home, payoff the loan balance and kept the remainder, or refinance the loan balance and keep the home.

Types of Reverse Mortgages Available


Homeowners may obtain any of the three reverse mortgage programs available, which include the Home Equity Conversion Mortgage (HECM), FNMA Homekeeper and a unique Cash Account Line of Credit. 

HECM

HECMs are backed by the United States Department of Housing and Urban Development (HUD).  They account for most reverse mortgages obtained today.   

Homekeeper

The Homekeeper program is administered by FannieMae (HUD is not involved but FannieMae is a government-sponsored enterprise).  This program is not used as often as the HECM because it usually provides less cash and has a slightly higher interest rate. 

Cash Account

The Cash Account program is privately administered, and often appeals to homeowners with higher value homes that are looking for larger amounts of cash.

Ways To Receive Cash From A Reverse Mortgage


The cash from a reverse mortgage must first be used in the following ways:

The remaining cash may be received in the following ways:

Tenure

Receiving payments for life (Tenure) is the option that most people are aware of.  It is usually best for homeowners that need additional cash every month.  Homeowners can count on receiving Tenure payments for as long as they live in their home.  This is the safest choice because the cash will never run out. 

Term

Receiving payments for a stated period of time (Term) is usually best for homeowners that need more monthly cash than Tenure will allow. 

Line of Credit

The Line of Credit option allows homeowners to receive cash whenever they want.  This option is best for homeowners that need additional cash occasionally rather than every month. 

Lump Sum at Loan Closing

Homeowners that need cash right away to payoff debts or cover immediate expenses may receive a Lump Sum at Loan Closing.  This option is available under all programs.

Combination Plan

Homeowners may choose a combination of the above options.  For example, they may decide to receive a Lump Sum at Loan Closing, set up a Line of Credit for emergencies, and receive Tenure payments.  The larger the Lump Sum at Loan Closing and Line of Credit, the smaller the Tenure payments will be.

Option Availability by Program

  Tenure Term Line of Credit Credit Line Growth*
HECM Yes Yes Yes Yes
Homekeeper Yes No Yes No
Cash Account No Yes Yes Yes

*Credit Line Growth: An interesting feature of the Line of Credit option is that the unused portion of the line of credit grows over time. This is almost like it is invested, but what's really occurring is your borrowing capacity is increasing (similar to when a credit card company increases your limit).

Qualifying For A Reverse Mortgage


To qualify for a reverse mortgage, all homeowners must be at least 62 years old, and there are no income or credit requirements.

The amount of outstanding mortgages and liens on the property may not exceed the cash available to the homeowners.  This is because the cash from a reverse mortgage must first be used to repay them.

The Process of Obtaining a Reverse Mortgage


Obtaining a reverse mortgage includes the following steps:

Responsibilities of the Homeowner

Responsibilities of the Lender

In addition to assisting the homeowners with the steps above, there are many additional responsibilities of the lender.  A reputable and experienced lender will assist you to identify and resolve any potential issues quickly, and make it easy every step of the way.

Are Reverse Mortgages For Everyone?


Just like many things in life, reverse mortgages are not for everyone.  They are best suited for retired homeowners on a fixed income who prefer to remain in their home and who need or would enjoy having more cash.  Homeowners who already have adequate income and assets to fund their retirement years probably don’t need a Reverse Mortgage.

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