“There are a lot of misconceptions and mis-information about reverse mortgages,” says Owen Coyle, a reverse mortgage expert.
Television ads with celebrities are relatively commonplace and are often utilized to educate the public on this little-known and often misunderstood government program. Politician Jack Kemp, Senator Fred Thompson, and actors Peter Graves and Henry Winkler have all been spokespersons attempting to inform the public. But what exactly is a reverse mortgage, and how does it work?
A reverse mortgage (also known as a home equity conversion mortgage) is a government-insured loan backed by the Federal Housing Administration (FHA) that allows senior homeowners to access a percentage of the equity in their homes and convert it into tax-free cash without selling the home or paying mortgage payments.
The government program was designed to help senior homeowners in retirement: to eliminate debts (mortgages and unsecured loans), to have a larger steady income, or to have a large source of savings to use.
Unlike other mortgages, there are no monthly payments. The equity in the home is used as the basis for the loan. The mortgagee can live in the home as long as he or she likes without having mortgage payments. The loan is re-paid out of the value of the home when it is sold.
There is a common misconception that homeowners who take out reverse mortgages no longer own their homes. The title of the home remains with the homeowner as long as he or she pays the taxes and the insurance (and complies with loan terms). Banks and lenders can only take title if the mortgagee does not meet their obligations. There is no risk of foreclosure since there are no mortgage payments.
Qualification is simple: A person must be 62-years-old or older, own their home, have equity in the home and occupy it as a primary residence (183 days or more each year). Applicants must not have previously defaulted on any government loans. Currently seniors are not required to have good credit or income, but there may be upcoming changes that will make qualification a little more difficult.
Eligible properties include single family residences, 2-4 unit dwellings, condominiums and manufactured homes (with land ownership).
There are significant benefits to the reverse mortgage. The owner can continue to live in the home as long as they wish without having to worry about mortgage payments. Payments do not need to be made on the loan as long as the mortgagee continues to reside there.
The source of funds can improve the quality of life and give “peace of mind.” The funds lent are tax-free (but not tax-deductible), and can be used for any purpose.
These could be things like vacations, medical expenses, paying off existing mortgage or debts, home improvements, long-term care insurance, care-givers, etc.
A reverse mortgage is a safe way to increase and supplement retirement income. The program does not interfere with Social Security or Medicare benefits. It may affect Medicaid benefits.
The amount owed can never exceed the value of the home. Current and future equity accrues to the benefit of the homeowner.
The mortgagee can select how they want to receive the equity income: monthly income, lump sum, credit line, or a combination thereof for life. According to Coyle, the adjustable rate Line of Credit has become a popular option for many seniors, who see it as an attractive “investment vehicle.”
The home can be left to children and heirs. If the home loses value, children and heirs will not be responsible for paying off the outstanding debt (federal insurance pays off the non-recourse loan to the lender).
There are also disadvantages to the program. FHA charges a mortgage insurance premium – to protect both lender and borrower – that must be paid upfront in loan closing fees. Since this is a loan, monies (interest expense) regularly due as payments accrue on the balance of the loan, potentially increasing the loan balance over time; this often can be offset with increases in home values that increase the home’s equity.
The loan comes due (payable to the lender) at the death of the mortgagee, the sale of the home or if the mortgagee moves out (e.g., to a nursing home facility), potentially reducing the equity available to be passed on to heirs.
The estate has approximately six months to repay the loan and can opt to refinance or sell the property and take the remaining equity. Often, the lender calls the loan, takes possession of the home and sells it to repay the loan. Again, heirs are not responsible for the shortfall if the home sells for less than the balance of the loan.
Age and equity are the primary determining factors for how much money one can receive. The 2013 maximum loan limit in Southern California was $625,000.
There are pros and cons to reverse mortgages, but be assured that this is a government-backed program designed to help seniors. Seek the help and advice of reverse mortgage professionals to completely understand the risks and benefits and to navigate the process.
Owen Coyle (DRE #01253295), Reverse Mortgage Specialist, contributed to this article. Reverse Mortgage West has been serving seniors in San Diego County since 2005. For more info: www.reversemortgages62.com. Contact Owen directly at (800) 830-2505, [email protected]