How Does A Reverse Mortgage Work
A reverse mortgage allows seniors to borrow against their home equity. Home equity conversion mortgages , the most common type of reverse mortgage, are available to homeowners 62 and older. With a reverse mortgage, instead of the borrower making monthly payments as with a mortgage, home equity loan or line of credit , the borrower receives monthly installments from their mortgage lender.
Youve already got a home, and the mortgage lender makes monthly payments to you, so they can get your house after you pass away, explains Tabitha Mazzara, director of operations at MBANC, a mortgage lender.
That said, reverse mortgage borrowers or their heirs can choose to repay the debt.
To protect the borrower and potential heirs, lenders are required by law to structure reverse mortgages so that the loan amount doesnt exceed the value of the property and if the borrower dies, the estate will not be responsible for paying the difference if the loan ends up being higher than the homes value. This can occur if home prices steeply decline, or if the borrower lives longer than expected.
How Do I Pay Back A Reverse Mortgage
A reverse mortgage allows homeowners 62 and older to convert a portion of their home equity into usable funds without having to repay the loan for as long as the loan obligations are met.1 The fact that reverse mortgages do not require monthly mortgage payments2 often leaves potential borrowers with questions about when the loan needs to be repaid.
The list below provides answers to common questions about how to pay back a reverse mortgage.
When does my reverse mortgage become due?A reverse mortgage becomes due when the borrower fails to meet the loan obligations or no longer occupies the home as their primary residence. The loan obligations require the borrower to pay for their own homeowners insurance, property taxes, and maintain their home in accordance with guidelines mandated by the Department of Housing and Urban Development.1 As long as these terms are met monthly mortgage payments are not required.
What happens when I pass away?When the last reverse mortgage borrower passes away, the loan becomes due. The heirs of the borrower have a few choices when it comes to repaying the loan. Heirs can sell the home to pay off the loan balance and retain any excess equity. Or, if they want to keep the home, they can refinance the loan, or pay it off out of pocket.
In the event the loan balance is greater than the value of the home, the heirs can either arrange to voluntarily turn over ownership of the property to the lender , or buy the home at 95% of the appraised value.
How Much Will I Pay In Reverse Mortgage Costs
There are several reverse mortgage costs, that could include, but are not limited to:
- Loan origination fee up to $6,000
- An upfront mortgage insurance premium, which costs 2% of your homes value
- An annual mortgage insurance premium, which costs 0.5% of your homes value
- A reverse mortgage counseling fee, which could cost $125 or more
- A home appraisal and title search fee, among other closing costs
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Be Sure To Explore All Options Before Taking Out A Reverse Mortgage
Reverse mortgages are complicated and usually not the best option for older homeowners seeking access to extra cash. Before taking out a reverse mortgage and tapping into your home equity, you should be sure to explore all of the options available to you. For instance, you might qualify for a state or local program to lower your bills or you could consider downsizing to a more affordable home.
You can learn more about reverse mortgages, as well as other available options for older homeowners, at AARP’s website at www.aarp.org/revmort. Even though you’ll have to complete a counseling session with a HUD-approved counselor if you want to get a HECM, it’s also highly recommended that you consider talking to a financial planner, an estate planning attorney, or a consumer protection lawyer before taking out this kind of loan.
Know How Reverse Mortgages Work Before A Borrowers Death
To take out a reverse mortgage, all borrowers have to be at least 62 years old. Borrowers also must have substantial equity in their house. The amount of equity needed depends on the age of the borrowers. Younger borrowers need about 60% equity in their homes to take out a reverse mortgage whereas borrowers over age 80 may only need 45%-50% equity.
When borrowers take out a reverse mortgage, the reverse mortgage pays off all other loans on their house including home equity lines of credit. If the lender approves them for a higher amount, borrowers can continue to borrow more money against their home. Borrowers can continue to draw money from their mortgage until they reach a principal limit based on the borrowers age, the interest rate on the mortgage and the value of the house.
With reverse mortgages, the balance on the loan grows over time. In some cases, the balance on a reverse mortgage may grow to be more than the value of the house. However, seniors who take out HECMs dont have to worry about losing their homes. HECM borrowers cannot lose their home as long as they continue to pay for taxes, insurance and maintenance on the property. Borrowers who take out jumbo reverse mortgages may not have all these protections.
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Where To Get A Reverse Mortgage
Two financial institutions offer reverse mortgages in Canada. HomeEquity Bank offers the Canadian Home Income Plan , which is available across Canada. You can get a reverse mortgage directly from HomeEquity Bank or through mortgage brokers. Equitable Bank offers a reverse mortgage in some major urban centres.
Shop around and explore your options before you get a reverse mortgage. Your financial institution may offer other products that might meet your needs.
Compare the costs of the following potential alternatives to a reverse mortgage:
- getting another type of loan, such as a personal loan, line of credit or credit card
- selling your home
- renting another home or apartment
- moving into assisted living, or other alternative housing
You may want to speak with a financial advisor and your family before getting a reverse mortgage. Make sure you understand how a reverse mortgage works and how it can affect your home equity over time.
Borrower Credit And Income Less Important
Because reverse mortgages don’t entail monthly payments from borrowers, lenders don’t need to assess a borrower’s likelihood of repayment. As a result, your credit history and income are less important considerations for a loan approval. In fact, until recently, many lenders did not consider credit or income at all in underwriting HECM applications. Incredibly, however, by 2011, 10 percent of all HECM borrowers were in default on their loans and in danger of foreclosure. Many borrowers failed to keep up with their property taxes and homeowners insurance a condition of their loans.
More than 8 in 10 American retirees will run out of money at some point.
For HECM loans originated on or after April 27, 2015, lenders must perform a financial assessment of all applicants to determine if the homeowner can reliably pay housing-related expenses, such as property taxes, homeowners insurance premiums and regular maintenance costs.
HECM applicants who fail their financial assessments may still be allowed to borrow. If the lender is willing, it can withhold some of the reverse mortgage proceeds to pay the taxes and insurance premiums when they come due.
It’s easy to find good reverse mortgage lenders. Use this reverse mortgage ranking tool to find a helpful, well-regarded reverse mortgage lender near you.
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How Do You Pay Back A Reverse Mortgage
A reverse mortgage is commonly paid back by using the proceeds from the sale of the home. If the loan comes due because youve passed away, your heirs will be responsible for handling the repayment and will have a few options for repaying the loan:
- Sell the home and use the proceeds to repay the loan.
- Refinance into a traditional mortgage or use their finances to purchase the home for the amount due on the loan or 95% of the appraised value of the home whichever is less.
- Sign the title over to the lender and walk away from the loan.
Spouses And Partners Have Both Rights And Obligations
When you and your spouse are co-borrowers on a reverse mortgage, neither of you have to pay back the mortgage until you both move out or both die. Even if one spouse moves to a long-term care facility, the reverse mortgage doesnt have to be repaid until the second spouse moves out or dies.
Because HECMs and other reverse mortgages dont require repayment until both borrowers die or move out, the Consumer Financial Protection Bureau recommends that both spouses and long-term partners be co-borrowers on reverse mortgages.
If your spouse is not a co-borrower on your reverse mortgage, then they may have to repay the loan as soon as you move or die. As for whether they can remain in your home without repaying, that depends on the timing of the HECM and the timing of your marriage.
If a reverse mortgage borrower took out an HECM before August 4, 2014, then a non-borrowing spouse does not have a guaranteed right to stay in the house. Instead, a non-borrowing spouse will either have to move out of the house or pay off the reverse mortgage within six months of receiving notice from the lender.
The rules are different for HECM loans that were issued after August 4, 2014. With these loans, an eligible, non-borrowing spouse can stay in the home after the borrowing spouse moves out or dies, but only if they meet these criteria:
If youre an eligible non-borrowing spouse, the reverse mortgage will not need to be paid until you die or move out of the house.
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For Reverse Mortgage Loans With Case Numbers Assigned Before August 4 2014
As explained in more detail below, after you, the borrower, die or move into a healthcare facility for more than more than 12 consecutive months, your lender or servicer can choose to either:
- Foreclose on the home, or
- Enter a process called Mortgage Optional Election Assignment that allows an Eligible Non-Borrowing Spouse to stay in the home.
Reverse Mortgages Impact On Other Government Benefits
Reverse mortgage payments are not counted as income if they are spent on care in the same month as they are received.
As most elderly persons receive multiple benefits from the federal government, one should not consider a reverse mortgage independent of its impact on other benefits. Fortunately, the most common benefits, including Medicare and Social Security, are not impacted in any way by a reverse mortgage. However, Supplemental Security Income, Medicaid, and Veterans Pension eligibility may be affected. These vary state-by-state. But generally speaking, reverse mortgage payments are not counted as income, as long as they are spent in the same month as they are received. However, if the funds are allowed to accumulate month over month, they could push ones resources over the allowable limits.
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Reverse Mortgages And How They Work
reversewithout having to sell your home
Reverse Mortgage Types
Home Equity Conversion Mortgages arefederally-insured reverse mortgages and are backed by the U. S. Department of Housing and Urban Development . HECM loans can be used for anypurpose.
Single-purpose reverse mortgages, but theyre not available everywherewhich the lender specifies Proprietary reverse mortgages
Do This To Avoid Foreclosure
Another danger associated with a reverse mortgage is the possibility of foreclosure. Even though the borrower isnt responsible for making any mortgage paymentsand therefore cant become delinquent on thema reverse mortgage requires the borrower to meet certain conditions. Failing to meet these conditions allows the lender to foreclose.
As a reverse mortgage borrower, you are required to live in the home and maintain it. If the home falls into disrepair, it wont be worth fair market value when its time to sell, and the lender wont be able to recoup the full amount it has extended to the borrower. Reverse mortgages are also required to stay current on property taxes and homeowners insurance. Again, the lender imposes these requirements to protect its interest in the home. If you dont pay your property taxes, your local tax authority can seize the house. If you dont have homeowners insurance and theres a house fire, the lenders collateral is damaged.
About one in five reverse mortgage foreclosures from 2009 through 2017 were caused by the borrowers failure to pay property taxes or insurance, according to an analysis by Reverse Mortgage Insight.
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How A Reverse Mortgage Also Can Be Paid Off Early
The process of paying off a reverse mortgage is not very complicated. But it is advised that you contact a reverse mortgage specialist to avoid potential issues.
Step 1: Choose a date to pay off your reverse mortgage. Request your lender no further draws against the credit line of the equity and a payoff statement that includes the month when the mortgage is to be paid off.
The payoff statement lists all payments made over the course of the mortgage, accumulated interest, and costs associated with borrowing the loan.
Step 2: The statement may also include 34 days of interest, which provides padding if the payment is posted after the first of the month.
Since a reverse mortgage is backed by the Federal Housing Authority, the posting takes place on the first business day of the month, and a weekend could push it to the third day of the month.
Step 3: If you are selling the home, you may claim reimbursement if you had prepaid the insurance for an entire year. So let your insurance agent know the expected payoff day.
Step 4: It is worth letting your title closing agent handle the mortgage paperwork and the lien releases on your behalf. The process requires released for the lender and the FHA for the mortgage insurance premium.
On the other hand, if you handle the payoff on your own, send a cashier check for the money through overnight mail or wire transfer to the lenders bank. Follow up to make sure that the lender has received the funds.
Reverse Mortgages Your Spouse And Heirs
Both spouses have to consent to the loan, but both dont have to be borrowers, and this arrangement can create problems. If two spouses live together in a home but only one spouse is named as the borrower on the reverse mortgage, the other spouse is at risk of losing the home if the borrowing spouse dies first. A reverse mortgage must be repaid when the borrower dies, and its usually repaid by selling the house. If the surviving spouse wants to keep the home, the mortgage loan will have to be repaid through other means, possibly through an expensive refinance.
Only one spouse might be a borrower if only one spouse holds title to the house, perhaps because it was inherited or because its ownership predates the marriage. Ideally, both spouses will hold title and both will be borrowers on the reverse mortgage so that when the first spouse dies, the other continues to have access to the reverse mortgage proceeds and can continue living in the house until death. The nonborrowing spouse could even lose the home if the borrowing spouse had to move into an assisted living facility or nursing home for a year or longer.
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So How Long Do You Have To Pay Off The Reverse Mortgage After Death
Typically, the children of the borrower get title to real property and then it becomes their responsibility to pay off the loan which would include the interest that has accumulated over the years. At first these beneficiaries are given six months to settle the debt. That means, the next of kin can refinance the property and pay off the debt that way and keep the property for themselves either to live in or rent out, or they can sell the property and pay back the debt that way and keep the remaining funds for themselves.
Typically those two methods are the most common but they are not the only methods. The lender does not care where the money comes from just so long as they get it. You can win the lottery and pay them off. How you do it is up to you.
Now, if per chance, and sticking to the two most common methods of repayment, next of kin run into obstacles in selling the house or getting a new loan, the lender extends the period to one year. All the lender requires is for those parties to show good faith though documentation, such as providing the listing of the property as for sale or specific paperwork that would indicate a new loan is in the works. Sometimes the lender might extend the period three months at a time, but youre allowed six months total extension. Now that you understand more about paying off a reverse mortgage after death, make sure you understand exactly how a reverse mortgage works before deciding if its right for you.
Reverse Mortgage Question & Answers
Do I need to own my home free and clear before I can get a reverse mortgage?
No. You can still obtain a reverse mortgage even if you have an existing mortgage lien on your property. However, your lender will require you to pay off the balance on your existing mortgage with the payout from the reverse mortgage. To do this, the balance on your existing mortgage must be low enough to pay off. You can’t have another mortgage lien encumbering your property once you have a reverse mortgage.
Can I end up in foreclosure with a reverse mortgage?
Yes, you could end up in foreclosure if you fail to honor your obligations to the lender. You must maintain your property and pay your property taxes and homeowners insurance premiums on time. Failure to make timely payments could put your property in foreclosure jeopardy. Your lender also requires you to continue to use the home as your primary residence. Failure to comply with any of these obligations may render your loan due and payable. Recent reforms have enabled mortgage lenders to hold back a portion of reverse mortgage proceeds to pay taxes and insurance on behalf of the homeowner if they believe the borrower will have difficulty with this responsibility. That’s the purpose of the required financial assessment for HECMs to identify borrowers who might be vulnerable to foreclosure and help them avoid it.
Can I get a reverse mortgage if I live in a condo, duplex or manufactured home?
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