Reverse Mortgages
What is a “reverse” mortgage?
A reverse mortgage is exactly what its name implies — a loan whose features make it essentially the reverse of a traditional “forward” mortgage. Instead of making monthly payments, you can choose to receive them. That’s the “reverse” part of a reverse mortgage. Instead of turning your income into equity, you turn your equity into readily accessible funds.
That last feature — the ability to turn your equity into readily accessible funds — is what most distinguishes a reverse mortgage from other loans, and it’s what can make it valuable to senior homeowners. Having spent years repaying the mortgage that allowed you to buy your home, you can now tap into that investment to help you achieve your goals later in life. However you plan to use your equity — whether paying medical expenses, improving your home, or just adding a bit of cushion to your monthly budget — you’ll have a golden opportunity to put your nest egg to work for you.
What happens to my home?
You remain the owner for as long as you continue to live there, keep the taxes current and maintain the property to FHA standards. After all, you’ve put a lot of money into your home, and you should have control over how to take it out.
Who is eligible?
To be eligible for a reverse mortgage, all owners listed on the home’s title must be at least 62 years of age and occupy the home as their principal residence for the majority of the year. The property must be a single-family or a one-to-four unit, owner occupied dwelling. Townhomes, detached homes, condominium units, planned unit developments (PUDs), and some manufactured homes or new construction properties are eligible.
Speaking with an approved reverse mortgage counselor is another important eligibility requirement. The Department of Housing and Urban Development (HUD) supervises counseling agencies that can work with you in person or, more commonly, over the phone. Be aware that a fee is charged for these services. The DC Team is happy provide you with a list of authorized counselors.
How Does a Reverse Mortgage Loan Work?
Rising debt, falling equity
The monthly payments you made to pay off your original mortgage generally served a common purpose — to decrease your debt and increase your equity. The payments you receive with a reverse mortgage have exactly the opposite effect — they increase your debt and decrease your equity.
How does a reverse mortgage work?
When you take out a reverse mortgage, the loan is based on the equity you already have in your home.
You do not need to repay the loan as long as you or one of the borrowers continues to live in the house, keep the taxes and insurance current, and maintain the property to FHA standards. If you sell the home for more than the loan balance at that time, you or your heirs will keep the difference.
How much can I borrow?
The maximum loan amount for a reverse mortgage is based primarily on several factors: the age of the youngest borrower, the value and location of the home, and the current interest rate. To obtain an estimate of the amount you could receive from a reverse mortgage, contact us today.
What else should I know about?
Besides interest, getting a reverse mortgage typically involves four types of fees:
- An origination charge
- Third-party closing costs
- Mortgage insurance premiums
- A monthly servicing fee
You can generally finance these costs as part of your loan by having them deducted from the loan proceeds. A useful reference for comparing the cost — including interest — of different reverse mortgage programs is the Total Annual Loan Cost (TALC), which expresses all of the loan’s various costs as an annual percentage. This formula serves a purpose similar to that of the Annual Percentage Rate (APR) that’s often used to compare forward mortgages.
There is also a fee for the required HUD counseling service, which is not included in the TALC estimate. This fee is paid up-front to the counseling agency and cannot be financed as part of the loan. Depending on the type of reverse mortgage you get, you may also have a choice of having the lender pay the fee or paying it as part of the loan proceeds.
- A fixed-rate reverse mortgage disburses funds in a lump sum to cover large expenses, such as paying off an existing mortgage or other debts.
- A variable-rate reverse mortgage offers access to the highest allowed amount of equity, offers choices for an immediate advance of funds, and provides several disbursement options:
- Monthly installments to supplement income for a predetermined period
- As a line of credit to draw on as necessary
- In a lump sum to meet large or immediate needs
- A combination of these options
- Borrowers can change their disbursement plans as many times as they wish.
- A fixed-rate offers the stability and security of a consistent interest rate that isn’t subject to market fluctuations, but provides limited disbursement options
- A variable-rate provides flexibility in choosing rate adjustments and pay-out options
- Annual rate adjustments are usually capped at two points per year and five points over the life of the loan. On the other hand, they provide a lower maximum loan amount.
- Monthly rate adjustments feature a larger maximum loan amount, but they usually have no annual adjustment cap, and instead are capped at ten points over the life of the loan.
You may already have plans for how you want to use your reverse mortgage proceeds. But it’s wise to remember all the work that’s gone into building up those funds, and how important they are to your financial security — particularly if your home is your largest remaining financial asset.
Of course, there was a reason you sought a reverse mortgage in the first place. Whether it was to improve your home, supplement your income, or pay for medical expenses, the important thing is that you decided to use your equity to improve your lifestyle and stay in your home. As long as you manage your money wisely and keep your goals in mind, your reverse mortgage will help you do just that.
Estimating what will be left
How much of your home’s equity will be left after repaying the loan depends on many factors: the size and frequency of your loan advances, increases or decreases in your home’s value, future interest rates, and others. Because so many variables are involved, no estimate will be absolutely certain. But your Wells Fargo reverse mortgage specialist can help you estimate your leftover equity as accurately as possible, based on how and when you plan to use your loan proceeds.
Considering your heirs
Whether you tap into your home equity with a reverse mortgage or through some other financing program, the more of that equity you spend now, the less will be left for your heirs. That’s why it is important to think about how you want to involve your children or other loved ones in the process.
Often, the adult children of senior borrowers are happy to see their parents continue living in their homes, and relieved to know that they are financially secure.
Tax and public-benefit considerations
The IRS currently treats reverse mortgage proceeds as loan advances rather than as taxable income. You may encounter tax implications if you use the funds to purchase an annuity, however, so you should check with your tax advisor regarding your vulnerability.
Proceeds from a reverse mortgage will have no affect on Social Security or Medicare benefits because they are not need-based. Benefits such as SSI and Medicaid, however, may be affected if you carry any of your reverse funds over from one month to the next. You should check with your local benefits program administrator to find out if you are in danger of becoming ineligible.
To get started on applying for a reverse mortgage, contact us today.
