Until reverse mortgages, seniors 62 years of age and older have not had the best choices when it came to getting cash from their homes. Traditional home loans only offered the option of either selling one’s house or borrowing against its equity. With a reverse mortgage seniors now have some additional cash-flow alternatives. This type of loan allows mature borrowers to convert their home equity into tax-free income without leaving their current home or making mortgage payments.
How a Reverse Mortgage Works
Reverse mortgages are probably best understood when compared side-by-side with traditional home mortgages, otherwise known as “forward” mortgages. The following table shows the differences between the two:
FORWARD MORTGAGE
- Uses income to pay debt
- Monthly mortgage payments
- Falling debt, rising equity
REVERSE MORTGAGE
- Uses home equity to get cash or credit
- No payments; debt is due when the borrower(s) pass away or relocate.
- Rising debt, falling equity
Both loans incur debt against your home, and both affect equity, but they do so in different ways. Traditional home mortgages require making monthly payments to a lender. With a Reverse Mortgage, payments are made to you using your home’s equity.
Reverse Types:
There are two primary types or reverse mortgages the fixed and the adjustable.
- A fixed reverse is generally better as a short-term fix. It usually as it will allow access to more funds immediately. Often used to fix a problem like debt consolidation or to help a friend/ family member.
- The adjustable mortgage is more of a long-term retirement solution. The adjustable reverse allows the homeowner to have a home equity line of credit (HELOC) to access your home’s equity when you need it. Most of the funds in the HELOC will not be available until 12 months have elapsed from the close of the reverse mortgage.
What a Reverse Mortgage Involves
Here are some important points to know when considering a reverse mortgage:
Eligibility: To qualify for a reverse mortgage, you must be at least 62 years of age. All owners who are on title and the mortgage must meet this age requirement. You must also have paid off all, or most, of your home mortgage. Lastly, the home you reside in must remain your principal place of residence.
Mandatory Counsel: In order to ensure that homeowners are fully aware of the financial ramifications of obtaining a reverse mortgage, you must undergo counseling with an unbiased third party before completing a loan. HUD and FHA oversee a network of counselors who can provide this service, and it should be offered for either a nominal fee or at no charge.
Tax-Free Income: One of the advantages of a reverse mortgage is that the money you receive will not be taxed. The amount you’ll obtain depends on several factors including the plan you select, the type of cash advances you choose, your age, and the value of your home. Typically, the older you are the larger the loan, as you will have more equity in the house.
Cost: The cost of a reverse mortgage varies considerably from one type to the next. However, you can typically use the money you receive to offset the loan fees. The costs will be added to the loan balance and must be repaid with interest once the loan terminates.
Repayment: Reverse mortgages do not require any payment as long as the borrower(s) remain in the home. Should the borrower(s) pass away, sell the home, or permanently relocate, then the loan would be due in full, along with interest and additional costs. If two borrowers are on the loan and one dies, the loan would not be due since one of them still occupies the home.
Requirements: The primary requirement for an individual over 62 years old and with enough home equity and is residual income. Residual income is a minimum income required to ensure the homeowner can afford to pay their monthly obligations. Residual income is calculated by deducting the monthly property taxes, insurance, debt and utilities from the borrower’s monthly income. The remaining dollar amount is the residual income and it must be equal to or higher than your home and family requirement. The number of occupants and region determine the residual income requirements.
| Family Size | Northeast | Midwest | South | West |
| 1 | $540 | $529 | $529 | $589 |
| 2 | $906 | $886 | $886 | $998 |
| 3 | $946 | $927 | $927 | $1,031 |
| 4 or more | $1,066 | $1,041 | $1,041 | $1,160 |
Residual income requirements as of 09/2017
Scenario: Two occupants in the West region.
$998 minimum residual income. Monthly Income = $2,000 per month
- Property taxes = $350 per month
- Insurance = $100 per month
- Debt = $200 per month
- Utilities = $210 = {($0.14 x 1,500 sq2) $0.14 x total square footage}
Total obligation: $860 per month
$2,000-$860 = $1,140 (income – monthly obligation = residual income)
$1,140 – $998 = $142 (residual income – residual income minimum = positive number is acceptable)
Residual income qualification: PASS
Sell or Stay?
The main reason people choose a reverse mortgage is to gain financial independence and maintain an adequate standard of living without leaving their current home. The best way to decide if a reverse mortgage is right for you is to compare it to the other option selling your house. To do this, ask yourself these three questions:
- How much cash can I get by selling my home?
- How much will it cost to buy or rent a new place?
- Is it worth my moving now, or do I prefer to do something else with the money?
Perhaps you’ll confirm what you knew all along, where you now live is the best place to be.
This material is not from HUD or FHA and has not been approved by HUD or a government agency.
