A Reverse Mortgage is a FHA insured loan that is specifically designed for homeowners, ages 62 and above, that allows you to convert a portion of the value of your home into tax-free money*, without ever having to sell your home, give up title or obligate yourself to a monthly mortgage payment.
As mentioned above, with a reverse mortgage, you never “obligate yourself to a monthly payment”.
More specifically, A reverse mortgage is not free money. You are still charged interest; it’s just that you are not actually paying it out of your pocket. This is true as long as you, or anyone else who is signed on the reverse mortgage loan, meets the following criteria:
- Living in the home as your primary residence
- Paying the property taxes and homeowner’s insurance
- Maintaining the property
The reverse mortgage loan only becomes due and payable when the last person who is signed on the loan can no longer live in the home, or when the youngest borrower turns 150 years old.
The “Limited Liability Notice” states:
Your liability under the Plan is limited to the net sale proceeds from the sale of the property. You will have no personal liability for the payment of the note. No deficiency judgment may be taken against you or the estate.”
“What happens to the interest I’m being charged?”
You are charged interest for as long as you keep the loan. However, instead of having to pay it every month like a regular mortgage, the interest is added to the loan balance. So your loan balance on the reverse mortgage loan gets larger instead of smaller. This is why the loan amount is between 48% – 70% of the value of the home.
The longer you keep the reverse mortgage, the larger the balance gets. Depending upon how quickly your home appreciates, your loan balance could very possibly eclipse the value of the home. But that’s OK!
FHA reverse mortgages have “mortgage insurance” on them. This protects the lender in the case that your loan balance does grow larger than the value of your home.
As long as you or your spouse (or whoever is on the loan with you) is living in the home and paying the property taxes, homeowner’s insurance and maintaining the home, it will make no difference at all how much is owed on the reverse mortgage. You could owe $100,000 more than the home is worth, but the lender can never kick you out because this is a 100% non-recourse loan.
The mortgage insurance pays the difference to the lender once the last borrower permanently leaves the home. In a nutshell, the lender is getting their money from the mortgage insurance, which means they can never come after you, your heirs or the estate for any deficiency.
Loan Programs & Interest Rates
There are a number of ways that you can receive the proceeds from a reverse mortgage:
- As a monthly payment for line (called a tenure payment plan)
- You can also receive payments of a pre-set period of time (called a term payment plan)
- You can set up a Line of Credit that you can draw on as you choose
- As a lump sum all at once (this is used to pay off an existing mortgage or to buy a new home)
- Or you can also choose a combination (Say you want to do some home improvements so you take $20,000 as a lump sum, but then you also need an extra $500 per month and then leave the rest of the money in a line of credit)
Of course situations can vary and you may be restricted by the new rules that limit the amount of money that you can withdraw during the first 12 months of the loan, but this example of how it works.
You can also choose to get the reverse mortgage on the home that you are currently living in, but if you decide to downsize, but upgrade your home and want to buy a new primary residence, you can do that with the reverse mortgage for purchase program.
The H4P (this stands for HECM for Purchase – HECM is the acronym for the FHA insured reverse mortgage program Home Equity Conversion Mortgage), works just like any other loan that you would take out to buy a home, but the H4P loan allows you to do it without making any mortgage payments.
The maximum loan amount is generally between 48% to 70% of the value of the being purchased. This means a substantial down payment is needed; Most of the time this money will come from the sale of your current home.
As far as interest rates go, you can choose a monthly adjustable rate, an annually adjustable rate or a fixed rate. Most of the time, everyone defaults to the fixed rate option, but this program is only allowed if you take all the money out as a lump sum. If you want to receive the money from the reverse mortgage as a line of credit or monthly payment, you would have to choose either the monthly or annually adjustable rate.