Reverse Mortgages

A reverse mortgage is a special type of loan made to older homeowners to enable them to convert the equity in their home to cash to finance living expenses, home improvements, in home health care, or other needs.

With a reverse mortgage, the payment stream is reversed. That is payments are made by the lender to the borrower rather than monthly repayments by the borrower to the lender as occurs with a regular home purchase mortgage.

A reverse mortgage is a sophisticated financial planning tool that enables seniors to stay in their home or "age in place" and maintain or improve their standard of living without taking on a monthly mortgage payment. The process of obtaining a reverse mortgage involves a number of different steps.

The first most widely available reverse mortgage in the United States was the federally insured Home Equity Conversion Mortgage (HECM) which was authorized in 1987.

A reverse mortgage is different from a home equity loan or line of credit which many banks and thrifts offer. With a home equity loan or line of credit an applicant must meet certain income and credit requirements begin monthly repayments immediately and the home can have an existing first mortgage on it. In addition there is no restriction on the age of borrowers.

In general reverse mortgages are limited to borrowers 62 years or older who own their home free and clear of debt or nearly so and the home is free of tax liens.

Borrowers usually have a choice of receiving the proceeds from a reverse mortgage in the form of a lump sum payment fixed monthly payments for life or line of credit. Some types of reverse mortgages also allow fixed monthly payments for a finite time period or a combination of monthly payments and line of credit. The interest rate charged on a reverse mortgage is usually an adjustable rate that changes monthly or yearly. However the size of monthly payments received by the senior doesn't change.

Some reverse mortgage products also involve the purchase of an annuity that can assure continued monthly income to the senior homeowner even after they sell the home.

The size of reverse mortgage that a senior homeowner can receive depends on the type of reverse mortgage the borrower's age and current interest rates and the home's property value. The older the applicant is the larger the monthly payments or line of credit. This is because of the use of projected life expectancies in determining the size of reverse mortgages.

Seniors do not have to meet income or credit requirements to qualify for a reverse mortgage.

Unlike a home purchase mortgage or home equity loan a reverse mortgage doesn't require monthly repayments by the borrower to the lender. A reverse mortgage isn't repayable until the borrower no longer occupies the home as his or her principal residence.

This can occur if the sole remaining borrower dies the borrower sells the home or the borrower moves out of the home say to a nursing home.

The repayment obligation for a reverse mortgage is equal to the principal balance of the loan plus accrued interest plus any finance charges paid for through the mortgage. This repayment obligation however can't exceed the value of the home.

The loan may be repaid by the borrower or by the borrower's family or estate with or without a sale of the home. If the home is sold and the sale proceeds exceed the repayment obligation the excess funds go to the borrower or borrower's estate. If the sales proceeds are less than the amount owed the shortfall is usually covered by insurance or some other party and is not the responsibility of the borrower or borrower's estate. In general the repayment obligation of the borrower or borrower's estate can't exceed the value of the property.

In general a borrower can't be forced to sell their home to repay a reverse mortgage as long as they occupy the home even if the total of the monthly payments to the borrower exceeds the value of the home.

HUD Reverse Morgages

Homeowners 62 and older who have paid off their mortgages or have only small mortgage balances remaining are eligible to participate in HUD's reverse mortgage program. The program allows homeowners to borrow against the equity in their homes.

Homeowners can receive payments in a lump sum, on a monthly basis (for a fixed term or for as long as they live in the home), or on an occasional basis as a line of credit. Homeowners whose circumstances change can restructure their payment options.

Unlike ordinary home equity loans, a HUD reverse mortgage does not require repayment as long as the borrower lives in the home. Mortgage companies recover their principal, plus interest, when the home is sold. The remaining value of the home goes to the homeowner or to his or her survivors. If the sales proceeds are insufficient to pay the amount owed, HUD will pay the company the amount of the shortfall. The Federal Housing Administration, which is part of HUD, collects an insurance premium from all borrowers to provide this coverage.

The size of reverse mortgage loans is determined by the borrower's age, the interest rate, and the home's value. The older a borrower, the larger the percentage of the home's value that can be borrowed.

For example, based on a loan at an interest rate of 9 percent, a 65-year-old could borrow up to 26 percent of the home's value, a 75-year-old could borrow up to 39 percent of the home's value, and an 85-year-old could borrow up to 56 percent of the home's value.

There are no asset or income limitations on borrowers receiving HUD's reverse mortgages.

There are also no limits on the value of homes qualifying for a HUD reverse mortgage. However, the amount that may be borrowed is capped by the maximum FHA mortgage limit for the area, which varies from $81,548 to $160,950, depending on local housing costs. As a result, owners of higher priced homes can't borrow any more than owners of homes valued at the FHA limit.

HUD's reverse mortgage program collects funds from insurance premiums charged to borrowers. Senior citizens are charged 2 percent of the home's value as an up front payment plus one half percent on the loan balance each year. These amounts are usually paid by the mortgage company and charged to the borrower's principal balance.

FHA's reverse mortgage insurance makes HUD's program less expensive to borrowers than the smaller reverse mortgage programs run by private companies without FHA insurance.