Reverse Mortgages: 10 Things You Must Know
Get a large wad of cash! Never make a mortgage payment again! Stay in your home as long as you want! Sounds like a great deal, right? Well, for someolder homeowners, a reverse mortgage can be.
For others, it’s more perilous than promising. If you’re considering a reverse mortgage, there’s a lot you need to know before signing on the dotted line.
Here’s 10 things you need to know about reverse mortgages.
What is a Reverse Mortgage? It’s a loan on your house that lets you tap your home’s equity. Like a cash advance, a bank fronts you the money — either as a lump sum, a line of creditor monthly draws — and you have to repay it eventually, with interest.
Unlike a traditional mortgage, you don’t have to repay the loan during the term of the reverse mortgage. Instead, you or your estate pay off the principalyou borrowed and the accrued interest all at once at the end of the loan.
Homeowners must be at least 62 and should either own their house outright orhave paid off most of the mortgage. You retain title and ownership of your house. You are still responsible for paying the property taxes and the costs of insurance and repairs. If you stillhave a regular mortgage, you either have to pay it off before taking the reverse mortgage or use part of the proceeds from the reverse mortgage to retireit.
The most popular type of reverse mortgage is the Home Equity Conversion Mortgage, or HECM, which is insured by the Federal Housing Administration.
(Private lenders may offer proprietary reverse mortgages but this is a small part of the overall market and these loans aren’t federally insured. Because ofthat, this article mainly addresses HECMs.)
How Much You Can Borrow with a Reverse Mortgage? The amount you can borrow, which is called the “initial principal limit,” with a reverse mortgage will depend on several factors, including the age of theyoungest borrower and interest rates. The calculation also includes either the appraised value of your home or the HECM mortgage limit, whichever is less. The HECM mortgage limit for 2021 is $822,375, up from $765,600 in 2020.
Generally, the older you are, the lower the interest rate and the higher the house value, the more money you’ll be able to tap.
You won’t be able to tap 100% of your equity. The calculation leaves room for accrued interest. Instead, you get a portion of the equity in your home andyou pay interest on that.
Getting Money from the Reverse Mortgage. You can take a lump sum, open a line of credit to tap whenever you choose or receive monthly payouts (either for a set number of months or for as longas you live in the house). Or you can choose a combination of those options — say, a lump sum for part of the mortgage with the remainder in a line ofcredit.
A fixed rate is typically only available if you take a lump sum, which could be suitable to lock in costs for those who want to use all of the money at once.Interest accrues on that amount.
A line of credit or monthly payout comes with an adjustable rate, which can change monthly or yearly. Ideally, you would only take out only the moneythat you need. You only accrue interest on funds that are dispersed to you so any untapped money won’t rack up interest.
Additionally, the unused portion also grows larger over time, generally at the same rate as the loan’s interest rate. Unlike a home equity line of credit,which can be reduced or frozen by a lender, a reverse mortgage line of credit is safe, thanks to mortgage insurance.
Non-Interest Costs of a Reverse Mortgage. There is an origination fee, which is 2% on the initial $200,000 loan and 1% on the balance, with a cap of $6,000. You’ll also pay closing costs, such astitle insurance and recording fees, that will likely run several thousand dollars.
You must also pay insurance premiums. The FHA insurance guarantees that you will receive your money and that the lender later receives its money.You’ll be charged an upfront premium of 2% of the home value, plus an annual 0.5% premium of the mortgage balance.
Finally, the lender may charge a monthly servicing fee of up to $30 if the loan has a ????xed-interest rate or if it adjusts annually. The servicing fee can beno more than $35 each month for loans with a rate that adjusts monthly. The monthly servicing fee will be added to your loan balance, or the lender caninclude the servicing fee in the mortgage rate.
It pays to shop around. Fees set by the government won’t vary, but some costs, such as the interest rate and the monthly servicing fee, can differ bylender.
Compare reverse mortgages from at least three lenders. Lenders will issue you a “total annual loan cost,” or TALC, for each option to help youcompare costs.
Repaying a Reverse Mortgage. The money does not have to be paid back as long as the homeowner remains in the house and keeps up with taxes, insurance and repairs. Generally,repayment is triggered when the homeowner dies, sells the house or moves out for at least 12 months. If a couple owns the home and one spouse dies,the surviving spouse can stay in the home without having to pay back the loan until he or she dies, sells or moves out for 12 months.
When it’s time to repay the loan, you or your estate will pay the principal you tapped and the accrued interest.
Be aware that the interest expense canreally accumulate. If you take out the loan in your 60s and stay in your house until your 80s, the interest owed on the loan could be signi????cant. After theloan is paid off, there could be little or no equity left to use, say, for a move to assisted living.
However, HECMs’ “non recourse” feature means you never have to pay back more than the house is worth at the time of sale. If the debt exceeds the salesprice, federal mortgage insurance covers the shortfall.
As for taxes, because the reverse mortgage is a loan, the money you receive is not taxable income.
But you can’t deduct the interest on your tax return each year. In the year the loan is paid off, you or your estate can write off at least part of the interest (see IRS Publication 936 (Home Mortgage InterestDeduction)
Options for Your Heirs. For a HECM, your heirs will have 30 days after receiving the due and payable notice from the lender to buy your house, sell it or turn it over to the lenderafter you pass away.
But they could get up to 12 months to secure ????nancing to buy the house or sell it. They would need to work with the lender to getadditional time.
To keep the home, your heirs will have to repay the full loan balance of the reverse mortgage or 95% of the home’s appraised value, whichever is less, fora HECM.
Jackie Stewart and Rachel L. Sheedy. the Editors of Kiplinger’s Retirement Report – brought to you by Reverse Mortgage Alabama. Where we are local and usually can give you a better deal on the costs mentioned in this article.