You’ve likely seen the TV commercials for reverse mortgages, with the late Fred Thompson, Henry Winkler and, lately, Tom Selleck. But just between us: Do you really understand how a reverse mortgage works? If not, don’t feel bad — in a March 2017 National Council on Aging survey, 66 percent of older homeowners said they’d need to do more research to understand a reverse mortgage line of credit.
But I can offer some assistance to help explain how reverse mortgages work and cautions about them, based on a reverse mortgage webinar I just hosted.
The one-hour Q & A With Reverse Mortgage Experts — which you can download here — featured answers to questions from Next Avenue readers and others. The webinar was one of six from the National Reverse Mortgage Lenders Association (NRMLA) as part of Reverse Mortgage Education Week. The four webinar experts were: Peter Bell, president and CEO of NRMLA; Lance Canada, a Certified Reverse Mortgage Professional with First Bank; Tera Guy, vice president for operations at James B Nutter and Company, a reverse mortgage lender; and Phil Stevenson, owner and principal of the reverse mortgage lender PS Financial Services and a Certified Reverse Mortgage Professional.
Before I get to some of the Qs and As, a definition: A reverse mortgage is a loan that lets homeowners age 62 and older convert their home equity into cash. It becomes due when the borrower moves, sells, passes away or fails to pay property taxes or homeowners insurance or maintain the property. The FHA-insured reverse mortgage is known as a HECM, which stands for Home Equity Conversion Mortgage; it’s available through FHA-approved lenders. Most reverse mortgages made today are HECMs.
The maximum size of a reverse mortgage depends on your age, home value, interest rates and upfront costs. The older you are, the more you can get.
In years past, many financial advisers discouraged older homeowners from taking out reverse mortgages, because the industry was rife with unscrupulous types. These days, however, advisers often recommend reverse mortgages for older Americans with home equity who are looking to supplement their retirement income, largely because the mortgages and lenders are better regulated.
Here are some of the reverse mortgage questions and answers:
What is the difference between a reverse mortgage and a home equity loan?
Unlike a home equity loan, a reverse mortgage doesn’t require monthly principal or interest payments or have a predefined due date. It cannot be frozen or reduced. A reverse mortgage can be a line of credit or proceeds can be received as a lump sum. NRMLA discourages borrowers from taking the money as a lump sum so they will avoid the danger of spending the cash and then not having enough to pay the necessary property taxes and homeowners insurance.
How does the principal get paid back?
A borrower can repay the reverse mortgage loan balance with proceeds from the sale of the home or by using personal funds to satisfy the debt. A borrower can choose to make payments on the loan at any time.
What’s the maximum amount someone can borrow against the assessed value of a home?
The amount depends on the person’s age (or the age of the youngest spouse on the loan), the home value, interest rates and upfront costs. The older someone is, the more money he or she can get. Generally speaking, borrowers can receive between 50 percent and 70 percent of the value of the home. The maximum amount on any HECM mortgage is $636,150. You can find a ballpark estimate for the biggest reverse mortgage you can get with NRMLA’s Reverse Mortgage Calculator.
Can reverse mortgages be trusted or can they sometimes be a scam?
An HECM reverse mortgage is an FHA-insured loan and scams, fraud and financial exploitation of older adults are considered elder abuse. NRMLA lenders must abide by the group’s code of ethics. All HECM reverse mortgage loan borrowers must meet with an independent third-party counselor before applying for the loan. These counselors must complete a HUD-approved training course teaching them how to recognize when a potential borrower appears pressured to take the loan. (You can find the counselors through the HUD site or call 800-569-4287 to locate one nearby.)
Is it true that at death your house is immediately taken by the mortgage company and there’s no time for children to get things out?
No. A reverse mortgage becomes due and payable when the last surviving borrower either: sells the home; conveys title to someone else; passes away; fails to pay property taxes, insurance premiums, condo fees and other “mandatory obligations” and all options to bring the loan current have been exhausted; fails to maintain the home and allows it to fall into disrepair or resides outside of the principal residence for a period exceeding 12 consecutive months due to physical or mental illness.
The loan servicer must be notified of any of these events within 30 days. Then, the lender will send a “demand letter” explaining the process and timeline for repaying the loan. Within 30 days of receiving the demand letter, borrowers or their estate must respond with a written intent to satisfy the loan. The NRMLA online brochure, What Do I Do When My Loan is Due?, goes into details about the process for repaying the loan.
Can you get a reverse mortgage on a condo? Are there any types of homes that are ineligible for reverse mortgages?
Yes, you can get an HECM reverse mortgage on a condo as long as the condo association is FHA-approved. Ineligible properties include: investment properties, vacation homes, co-ops and bed and breakfasts.
For More Information on Reverse Mortgages:
If you’d like to learn more about reverse mortgages, here are a few suggestions:
Next Avenue’s article: “Reverse Mortgages: The Rewards and Risks”
The Consumer Financial Protection Bureau’s online brochure, Considering a Reverse Mortgage?
The National Council on Aging’s online brochure, Use Your Home to Stay at Home
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