Reverse mortgages have been around for awhile – since the 1960s, actually – but for many people, they still seem like a relatively new financial product. So it's not surprising that potential borrowers still have a lot of questions about them.
Here are answers to some of the most important ones.
"Am I eligible for a reverse mortgage?"
Reverse mortgages are limited to borrowers age 62 or above. For couples, only one borrower needs to meet the age requirement. You need at least 40-50 percent home equity to qualify.
Your income and credit score matter only insofar as your ability to pay your property taxes and homeowner's insurance, and to maintain the property.
“How much money can I get?”
This is one of the first questions people ask. But there is no hard-and-fast answer.
The amount for which a borrower qualifies depends upon their age (or the age of the younger spouse, when a couple applies), current interest rates and the appraised home value. An FHA-backed reverse mortgage, called a HECM (Home Equity Conversion Mortgage) will have a maximum amount based on property values in the area where the borrower lives.
Generally speaking, the older the borrower and the more valuable the home, the larger the loan can be. There are reverse mortgage calculators available online that will estimate how large the loan can be. Any member of the National Reverse Mortgage Lenders Association can also give an estimate.
“How can I use the money from a reverse mortgage?”
With most reverse mortgages, the funds can be used for anything. These loans are often used for remodeling, to pay down debt, for medical care or simply to enhance the standard of living. You can pay off your current home loan by converting your remaining debt to a reverse mortgage. You can even use a reverse mortgage to buy a home if you can make a sufficient down payment.
“How can a person receive the funds from a reverse mortgage loan?”
There are four basic choices. A borrower chooses the option that he or she prefers. In some cases, two options can be combined. An option can often be changed later on for a small fee.
- Lump sum: A single cash distribution
- Term: Equal monthly payments for the number of months selected by the borrower.
- Tenure: Equal monthly payments for as long as the borrower lives and occupies the property.
- Line of Credit: A preset limit is established, against which you can borrow as much as you wish, in whatever amounts and at whatever times you choose. It's like a credit card backed by your home.
"Can the lender take my home if I live longer than anticipated?”
The answer is “No." No loan payments need to be made as long as you live in the house, keep the taxes and insurance paid and maintain the house."
"How is a reverse mortgage repaid?"
Repayment is made when the borrowers die or no longer use the home as their principal residence. At that time, there are two choices. The borrowers' heirs can sell the house and repay the loan from the proceeds. Funds from the sale in excess of the loan amount become part of the borrower’s estate. Otherwise, the heirs may choose to repay the loan and receive a free and clear title to the property.
“What are the costs and fees of an HECM?”
Most of the costs of an FHA HECM can be paid by financing them and having them paid from the loan amount, so they will not have to be paid as out-of-pocket expenses. Fees include an origination fee, closing costs, interest, servicing fees and a mortgage insurance premium.