How Does A Reverse Mortgage Work When You Die
Its important to have a plan to deal with your reverse mortgage loan after you die. Family members also need to understand their options for keeping the house, as well as their payment responsibilities. Repaying the loan can get complicated, depending on how much equity you have in your house and whether you want the house to stay in your family after your death.
Avoiding Reverse Mortgage Scams
With a product as potentially lucrative as a reverse mortgage and a vulnerable population of borrowers who may either have cognitive impairments or be desperately seeking financial salvation, scams abound. Unscrupulous vendors and home improvement contractors have targeted seniors to help them secure reverse mortgages to pay for home improvementsin other words, so they can get paid. The vendor or contractor may or may not actually deliver on promised, quality work they might just steal the homeowners money.
Relatives, caregivers, and financial advisors have also taken advantage of seniors either by using a power of attorney to reverse mortgage the home, then stealing the proceeds, or by convincing them to buy a financial product, such as an annuity or whole life insurance, that the senior can only afford by obtaining a reverse mortgage. This transaction is likely to be only in the so-called best interest of the financial advisor, relative, or caregiver. These are just a few of the reverse mortgage scams that can trip up unwitting homeowners.
What Are The Costs Of A Reverse Mortgage
HUD adjusted insurance premiums for reverse mortgages in October 2017. Since lenders cant ask homeowners or their heirs to pay up if the loan balance grows larger than the homes value, the insurance premiums provide a pool of funds that lenders can draw on so that they dont lose money when this happens.
One change was an increase in the up-front premium, from 0.5% to 2.0%, for three out of four borrowers and a decrease in the up-front premium, from 2.5% to 2.0%, for the other one out of four borrowers. The up-front premium used to be tied to how much borrowers took out in the first year, with homeowners who took out the mostbecause they needed to pay off an existing mortgagepaying the higher rate. Now, all borrowers pay the same 2.0% rate. The up-front premium is calculated based on the homes value, so for every $100,000 in appraised value, you pay $2,000. Thats $6,000 on a $300,000 house, for example.
All borrowers must also pay annual MIPs of 0.5% of the amount borrowed. This change saves borrowers $750 a year for every $100,000 borrowed and helps offset the higher up-front premium. It also means that the borrowers debt grows more slowly, preserving more of the homeowners equity over time, providing a source of funds later in life, and increasing the possibility of being able to pass down the home to heirs.
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What Are The Risks Of A Reverse Mortgage Line Of Credit
As with any loan, there are risks associated with Reverse Mortgages.The biggest risk is that you may owe more money than your home is worth when the loan becomes due. This could happen if your home declines in value or if you live a long time and the interest on the loan compounds. Another risk is that you may not have enough money to pay for property taxes, homeowners insurance, or maintenance costs. If you dont pay these expenses, your Reverse Mortgage could become due immediately.
Do This To Avoid Foreclosure From A Reverse Mortgage
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 that it has extended to the borrower. Reverse mortgage borrowers 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, then 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 was caused by the borrowers failure to pay property taxes or insurance, according to an analysis by Reverse Mortgage Insight.
|Reverse Mortgage Interest Rates|
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How Do You Receive Funds From A Reverse Mortgage
Several options are available for receiving funds from a reverse mortgage. It depends on what you will be using the money for, how much you want to take and what works best for you and your situation. As with any type of mortgage or loan, shopping around is encouraged. It is worth gathering quotes from multiple reverse mortgage lenders so you can get the best interest rates and the overall best deal.
Lump-sum payment: This allows you to receive all the money that you are borrowing as one payment when the loan closes. Then you decide how to divvy it up and use the cash.
Annuity: Also known as a tenure plan, this option gives you equal monthly payments for as long as you live in the home as your primary residence. This is basically living on a fixed income and knowing exactly what to expect each month.
Term payments: Equal monthly payments are given with this option for a set term. Many borrowers request a term of 10 years.
Line of credit: With this option, the money is there and available to the homeowner to access when needed. Interest is only applied to the money that gets borrowed. This is a great option for someone who wants to know that they have the money on hand, but can also decide whether they really need to use it or not.
Monthly payments plus line of credit: Equal monthly payments are given in this option, but the line of credit is still there to access if desired.
What Home Sale Proceeds Sharing Costs
It’s not a loan, so you don’t pay interest. You pay a fee for the transaction and to get your home valued . You may also have to pay other property transaction costs.
Home sale proceeds sharing costs you the difference between:
- what you get for the share of your home you sell now, and
- what it’s worth in the future
The more your home goes up in value, the more the provider will receive when you sell it.
Get the provider to go through projections with you, showing the impact over time. Get a copy of this to take away, and discuss it with your adviser. Ask questions if there’s anything you’re not sure about.
Are All Reverse Mortgage Companies The Same
No! Every reverse mortgage company operates independently of the government. HUD is the entity behind the reverse mortgage and underwriting guidelines but is not involved in the origination process. Make sure the lender you are working with is approved by HUD, a member of NRMLA, and dont forget to compare rate and fees with multiple sources.
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.
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How Much Equity Is Needed To Get A Reverse Mortgage
Home equity is derived by subtracting any outstanding secured debts against the home from the appraised value of your home. The total amount that you can borrow must be greater than or equal to any outstanding secured debt on the home. To get a reverse mortgage, your home must be valued at a minimum of $200,000.
How Is A Reverse Mortgage Purchase Different From A Traditional Mortgage
A reverse mortgage purchase differs from a traditional loan purchase in a couple areas. A reverse mortgage loan will require a larger down payment in most instances than traditional loans, and can go as high as 95% loan to value. Additionally, a reverse mortgage purchase follows FHA guidelines that has more regulations related to fees allowed to be paid by the seller and concessions from the seller.
ARLO recommends these helpful resources:
- Read about our own HECM Purchase client success story in Kiplingers Retirement Report
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Reverse Mortgages Are No Longer Just For Homeowners Short On Cash
Turning your home equity into cash can help pay bills and preserve other savings and investments. But theyre complicated, and not for everyone.
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After her husband died suddenly from a fall in 2016, Marjorie Fox decided to hold off on any big decisions. She waited two years to retire as a financial planner and three to sell their house and buy a lakeside townhome in Reston, Va. For added protection, she took out a reverse mortgage on her new home.
Ms. Fox, 75, had set aside $150,000 in a cash reserve, and the reverse mortgage was another backup. If something unexpected did happen, it could be when the stock market is down and it could be an inopportune time to sell assets, she said. Reverse mortgage borrowers can take the money as a lump sum, as fixed monthly payments or as a line of credit. Ms. Fox chose a line of credit, which she could tap as needed.
Within a year, her cash reserve was depleted, and Ms. Fox began pulling money from her reverse mortgage. Among her expenses: $50,000 on emergency dental work and a down payment to reserve a spot in a retirement community set to open in 2025. Untapped money in the line of credit earns interest.
Protecting The Nest Egg
Taking withdrawals from investment accounts during market downturns, especially early in retirement, can wreak havoc on the longevity of a portfolio. Instead of locking in losses, a retiree who uses a coordinated strategy could cover expenses and protect savings by pulling funds from a reverse mortgage when markets drop, according to several studies.
When a portfolio is down, taking something from it drives it further down and makes it much harder to come back, said Barry Sacks, a pension lawyer who conductedstudies that showed using a reverse mortgage during market downturns could help portfolios stay on track.
This strategy works best for retired homeowners with investment portfolios of $500,000 to $1.5 million, said Mr. Sacks, who has a reverse mortgage on one of his two homes in Northern California.
In a December 2021 study, Mr. Sacks and co-researchers found that in various scenarios, retirees who used a coordinated strategy were the least likely to run out of money over 30 years. That compared with a considerably higher risk of cash flow exhaustion for retirees with similar wealth who never used a reverse mortgage or who opened one after depleting their investments.
To use this strategy, Mr. Sacks said, retirees should look in January at how their portfolio compares with a year earlier. If it has shrunk because the investments declined, they should pull cash for the coming years expenses from their reverse mortgage and enable the investments to recover.
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What An Equity Release Agreement Costs
It’s not a loan, so you don’t pay interest. Instead, you pay fees such as:
- an application fee
- periodic service fees, potentially deducted in advance from your home’s equity
- a fee to end the agreement
Get the fund to go through projections with you, showing the impact on your home equity over time. Get a copy of this to take away, and discuss it with your adviser. Ask questions if there’s anything you’re not sure about.
How Home Equity Release Works
‘Equity’ is the value of your home, less any money you owe on it .
‘Home equity release’ lets you access some of your equity, while you continue to live in your home. For example, you may want money for home modifications, medical expenses or to help with living costs.
Ways to access equity in your home include:
- reverse mortgage
- home sale proceeds sharing
- equity release agreement
- the Government’s Pension Loans Scheme
The amount of money you can get depends on:
- your age
- the value of your home
- the type of equity release
Your decision could affect your partner, family and anyone you live with. So take your time to talk it through, get independent advice and make sure you understand what you’re signing up for.
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Can You Refinance A Reverse Mortgage
Yes. You can refinance a reverse mortgage as long as it has been at least 18 months since you closed on the original reverse mortgage. Due to the exceptionally high origination fee and other fees, refinancing a reverse mortgage should be reserved for situations where a spouse needs to be added to the loan, more equity is needed, or the interest rate can be lowered substantially.
How Much Does A Reverse Mortgage Pay
The amount of money you can borrow depends on how much home equity you have available. You typically cannot use more than 80% of your homes equity based on its appraised value. As of 2018, the maximum amount anyone can be paid from a reverse mortgage is $679,650. However, most people will be paid much less.
The exact amount the reverse mortgage will pay you depends on a few different factors, including your age, the current home value, and your interest rate. The chart below shows how much of a difference these factors can make it determining the amount of equity you can tap into:
|4% interest rate|
Maximum percentage of home equity that can be borrowed in a HECM
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If You Are Considering A Reverse Mortgage Consider The Following Tips:
Look at all of your options. If you need some cash, you may have other and cheaper options. For example, a traditional home equity loan or line of credit may be a better option for you.
Review costs and fees. Reverse mortgages may be costly. Lenders sometimes charge up-front origination fees and closing costs. A reverse mortgage can be expensive, especially if you only plan to live in your home a few years.
Shop around. As with any purchase, shop around for the best price. The costs associated with a reverse mortgage, including interest rates, closing costs, and origination fees, can vary among lenders.
Beware of sales gimmicks. Be extremely cautious if anyone tries to sell you somethingâbe it a new roof or a financial product like an annuity or long-term care insuranceâand suggests that you pay for it with a reverse mortgage. A lender, broker or originator cannot require you to purchase an annuity, investment, life insurance, or a long-term care insurance product as a condition of obtaining a reverse mortgage loan.
Beware of fear tactics. Some unscrupulous agents use fear to push their products. Be skeptical of agents who use fear of going into a nursing home or running out of money to sell you a reverse mortgage. Beware of lenders or agents who falsely tell you that the government has somehow endorsed the sale of reverse mortgages.
Reverse Mortgages: Why To Use One And When It Makes Sense
Reverse mortgages are helpful financial tools when it comes to investing in your future. They can offer financial peace of mind and provide a better retirement.
Best of all, youre able to remain in your home as the homeowner while you collect payouts from your mortgage. As long as you keep up with property taxes, homeowners insurance, and maintenance costs, you have nothing to lose and so very much to gain.
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Is A Reverse Mortgage A Good Idea
A reverse mortgage can be a help to homeowners looking for additional income during their retirement years, and many use the funds to supplement Social Security or other income, meet medical expenses, pay for in-home care and make home improvements, Boies says.
There are also flexible ways to receive the money from the reverse mortgage: a lump sum, a monthly payment, a line of credit or a combination.
Plus, if the value of the home appreciates and becomes worth more than the reverse mortgage loan balance, you or your heirs may receive the difference, Boies explains.
The opposite, however, can pose a problem: If the balance exceeds the homes value, you or your heirs may need to foreclose or otherwise give ownership of the home back to the lender.
There are also potential complications involving others who live in the home with the borrower, and what might happen to them if the borrower dies. Family members who inherit the property will want to pay close attention to the details of what is necessary to manage the loan balance when the borrower dies.
There are provisions that allow family to take possession of the home in those situations, but they must pay off the loan with their own money or qualify for a mortgage that will cover what is owed, McClary says.
Additionally, while not all reverse mortgage lenders use high-pressure sales tactics, some do use them to attract borrowers.