Over the past few years, reverse mortgages have become quite popular.  In fact, if you are nearing retirement age, it is likely that you have heard someone mention a reverse mortgage.  If you are retiring to another state, it is worth investigating if a reverse mortgage may be right for you.  Reverse mortgages can be a powerful financial tool to use to allow you to downsize, upsize, or move closer to family and friends.

So, what exactly is a reverse mortgage?  

A reverse mortgage is a loan option for homeowners age 62 and older that does not require monthly payments.  The loan is actually paid off when the borrower either moves out or dies.

What are the requirements of a reverse mortgage?

  • The minimum age is 62 years old.
  • Borrowers must either own the home outright or have a considerable amount of equity.  Typically a homeowner will need at least 60% of equity.
  • The home must be a primary residences.  Second homes and vacation homes are not acceptable collateral for reverse mortgages.
  • The homeowner must be able to continue to pay the property taxes, insurance, homeowner’s fees and any other ongoing property expenses.
  • The borrower must not have any overdue federal debt.

What types of homes qualify for a reverse mortgage?

  • Single-family homes
  • 2-4 Unit homes that have at least one unit occupied by the borrower
  • HUD approved condominiums
  • FHA approved manufactured homes

Why would anyone get a reverse mortgage? 

A homeowner may decide to get a reverse mortgage so that they can convert their home equity into cash without having to pay a monthly mortgage payment.  This is particularly attractive to homeowners that are in need of additional monies but cannot afford to make additional monthly payments.  Others may be able to afford the payments but prefer to not have payments and keep their money liquid.

How much can I borrow on a reverse mortgage?

The amount that you can borrow on a reverse mortgage will depend on the age of the youngest borrower or non-borrowing spouse, the current interest rate, the appraised value of the home, and the initial mortgage insurance premium.  Typically, the most that you can borrow on a home is 60% of the equity.

How does a reverse mortgage work? 

Like a traditional mortgage, the lender will make a loan to a homeowner and use the home as collateral.  The lender will file a deed of trust on the subject property. However, unlike a traditional mortgage, the homeowner does not make monthly mortgage payments.  As an example, John and Jane Smith, ages 70 and 67, have a mortgage of $100,000 on a property worth $550,000.  They need money for some healthcare expenses but cannot afford to borrow any additional monies because they cannot afford any additional monthly payments.  The Smiths get a reverse mortgage of $250,000 in which they pay off the existing mortgage of $100,000 and they get $150,000 less any closing costs that were not financed.  Since the Smiths do not make monthly payments, their loan balance will increase over time as the lender collects interest for the loan that they made to the homeowner.  The loan will be required to be repaid if they sell the home.  Typically, the loan is not required to be repaid until both spouses have passed away.

Can you use a reverse mortgage to purchase a home?

Yes, you can purchase a home with a reverse mortgage.  These types of loans are called home equity conversion mortgages (HECM).  These loans are different than a traditional reverse mortgage as they have different guidelines and closing costs.  These loans are typically 60% or less of the purchase price or appraised value, the lesser of the two.  So, the borrower would put down 40% or more of the value of the home and have no monthly mortgage payments.  A HECM loan is perfect for individuals that wish to keep their retirement funds and other monies liquid.  During retirement years, many prefer not to have monthly mortgages as they are on a limited, fixed income.

If you are considering a HECM, you should know that in order to be approved, you will need to meet the following guidelines:

  • The youngest homeowner must be over the age of 62
  • You must move within 60 days after purchasing the home
  • The home must be your primary residence
  • You will need a down payment of at least 40%
  • The lender will have to verify the source of down payment 

How much are closing costs on a HECM?

The closing costs will vary depending on your loan amount and the area in which you live.  Usually, you can finance all of the fees into the loan except for the Housing and Urban Development (HUD) fees.  Typically, the items associated with closing costs are as follows:

  • Initial Mortgage Insurance Premium (MIP)
  • Loan Origination Fee.  This is the lender’s fee and will depend on the lender.  However, the law states that there is a maximum fee of 2% of the first $200,000 of the home value and 1% of the amount over $200,000.  There is a maximum of a $6,000 origination fee.
  • Home Appraisal
  • Title Fees.  These fees include title insurance, title examination and settlement, recording of the deeds, and document preparation by the attorney.
  • HUD fee for independent counseling
  • Flood Fee
  • Wire Fee
  • Credit Report