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Frequently Asked Questions About Reverse Mortgages
Reverse Mortgage Basics
What is a reverse mortgage? A reverse mortgage allows persons age 62 and older who own a home to use the equity in their home to create tax free income. Instead of creating new payment obligations, as would be the case with a traditional home equity mortgage, the lender makes payments to the homeowner— either in a lump sum or in fixed monthly payments. The homeowner is never required to repay the loan until he or she moves out of the home, at which point the proceeds of the sale of the home are used to pay off the loan. What are the limits on how much income I can receive from a reverse mortgage? Reverse mortgage limits are based on:
- Borrower Age: The older the borrower(s), the more money you can receive. If there are 2 borrowers (as in the case of a married couple), the age of the younger spouse is used to determine limits.
- Value of the Home: All lending programs require a professional appraisal. The higher the value of the home, the more money you can receive.
- Market Interest Rates: As with all things in real estate, prevailing market interest rates drive these lending programs. When rates are lower, reverse mortgage proceeds will typically be higher.
- Government Program Limits: Reverse mortgages obtained under certain government programs are subject to limits based on the geographic location of the home. Limits for loans obtained under private programs are tied to the underlying appraised value of the home.
Are there any limits on how I can use the loan proceeds? No. Reverse mortgage proceeds can be used for anything the homeowner needs, whether for retirement vacations, home improvements, new cars, normal living expenses, property tax payments or otherwise.
Qualifying for a Reverse Mortgage
Will my home qualify for a reverse mortgage? Most types of homes will qualify, including single family homes, manufactured homes built after 1976, condos and townhomes. Cooperative housing typically does not qualify, particularly in government programs. However, some private lenders have programs that allow reverse mortgages for cooperative housing / co-ops in New York. I am in poor health— will this limit my ability to get a reverse mortgage? No. Eligibility for a reverse mortgage is based on homeownership and the amount of equity (appraised value less other mortgages/debt) in the home. You can apply even if you are in poor health. Are there any income requirements for getting a reverse mortgage? No. Eligibility for a reverse mortgage is based on homeownership and the amount of equity (appraised value less other mortgages/debt) in the home. You do not have to meet any minimum income requirements in order to qualify. My house already has a mortgage— can I still get a reverse mortgage? Yes. However, the reverse mortgage must be in a first lien position. This means that there cannot be another loan on the property that is senior to the reverse mortgage. If you have an existing mortgage, it must be paid off with the proceeds from the reverse mortgage, which will reduce the amount of benefits you can receive from the reverse mortgage. On the plus side, you will not have a monthly payment if the proceeds of the reverse mortgage are sufficient to pay off the existing loan, and you are free to do as you wish with any excess proceeds. What if the amount of my first mortgage is too high to be paid off by the proceeds from a reverse mortgage? In this case, if you can come up with cash to cover the deficit amount (i.e. the difference between the original mortgage and the allowed amount of a reverse mortgage), you can still obtain a reverse mortgage. If you do not have sufficient cash reserves, you can receive a gift or grant to cover the deficit amount— from a friend or relative, for example— but you cannot take on extra debt on the home.
After Your Mortgage Closes
When does the lender get its money back from a reverse mortgage? No payments are due on the loan while it is outstanding, assuming you continue to occupy your home a your principal residence. When you pass away or— in the event you predecease your spouse— when your spouse passes away, or you sell your home or you otherwise cease to occupy the home as your principal residence, the loan must be repaid— usually from the sale proceeds on the house. What happens when my home is sold? As with any home sale, any liens on the home— in this case, the reverse mortgage— are repaid from the sale proceeds. Any excess sale proceeds go to you or your estate.
Making a Decision on Your Reverse Mortgage
Is a reverse mortgage right for me? Assuming you meet the home ownership and age guidelines for a reverse mortgage, you should also consider:
- How long you intend to remain in your home: A reverse mortgage is a great way to harvest the built up equity in your home in your later years without taking on new monthly payment obligations. However, if you expect you might leave your home in the first few years after taking out your reverse mortgage, a reverse mortgage might not be right for you, as there are some up-front costs associated with initiating the loan.
- Whether you want to pass your home on to your children: The normal mechanism for paying back a reverse mortgage is the sale of the home. If you intend to pass your home on to your children, you should consider other options for harvesting the equity from your home.
Should I get a reverse mortgage now or wait? In the future, it is likely that you would receive more from your reverse mortgage because you will be older and your house (likely) will be worth more. In addition, if your house currently exceeds the loan limit for your area, it may not in the future, as the area lending limits typically increase each year. A higher limit would allow you to tap more of your equity with a reverse mortgage. There is a risk to waiting, however, when interest rates are low, as higher interest rates will reduce your borrowing capacity. What are my other options if a reverse mortgage isn't right for me? If a reverse mortgage is not right for you, you might also consider a home equity loan, assuming you have sufficient equity in your home and are able to manage the monthly payments. Alternatively, if you are having problems affording your property tax payments, check to see if your local government offers interest free loans or other grants. You could also consider selling your home and relocating to a less expensive home, which would free up some spendable equity interest free. Will a reverse mortgage affect my Social Security or Medicare benefits? In and of itself, having a reverse mortgage does not affect Social Security or Medicare benefits you may receive. HOWEVER, since Medicaid eligibility is based on assets, you should be aware that any unspent loan proceeds would result in assets (i.e. cash) in your bank account. For example, if you decided to take a lump sum payment of $50,000 and did not immediately spend these proceeds (within the month of the payment), any left over balance remaining in your bank account would count as an asset for Medicaid purposes. If this amount is more than $2000 for an individual or $3000 for a couple, you would not be eligible for Medicaid benefits. What are my options for receiving the loan proceeds? -
In selecting how you will receive funds from your reverse mortgage, you have several options:
- Lump Sum Payment: You can receive the maximum allowable balance all at once in a lump sum payment. Beware of using this option if you are on Medicaid, as it could create an asset that counts against Medicaid eligibility if not spent immediately.
- Fixed Monthly Payments: Your banker or broker can set you up to receive a fixed monthly sum that can supplement other forms of income, giving you extra spending money each month. You have the option of a fixed monthly sum that lasts for a specific amount of time or, alternatively, a different amount for however long you live in the home.
- Line of Credit: This tends to be the most popular option, which allows you to draw on your reverse mortgage on your own schedule— dry powder for when you need extra cash.
- Combination: You can set up your loan to use any combination of the above options.
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