The reverse mortgage is a fantastic product, but it’s not the right solution for everybody. Is it right (or wrong) for you? In this article, we’ll cover key reverse mortgage information for 2022 to help you decide if a reverse mortgage is the right solution for you.
There is quite a bit of reverse mortgage information for 2022 in this article, so we’ve included the following table of contents to make it easier to navigate through the content. We’ve also included “Back to Top” links throughout the article so it’s easier to return to the top of the page. We hope you find this information helpful! If you have any questions, feel free to post them in our Q&A.
Table of Contents
- Why the Reverse Mortgage?
- What Is a Reverse Mortgage?
- HECM Reverse Mortgage Basics
- Common Myths and Misconceptions
- How the Reverse Mortgage Works
- Payout Options
- How to Calculate Reverse Mortgage Proceeds
- Closing Costs
- Reverse Mortgage Requirements
- Reverse Mortgage Counseling
- Finding Reverse Mortgage Lenders
- Reverse Mortgage Calculators <— Click here for reverse mortgage calculator links
- Summary of What We’ve Covered
Note that this article is not intended to be a comprehensive source of information about reverse mortgages. Where relevant, we’ve linked to other articles on this site where you can get more in-depth information about a given topic.
Reverse Mortgage information for 2022?
According to US Census data, the median household net worth for seniors 65 or older is $201,500. At first blush, that sounds like a good statistic, but here’s the problem: almost 70% of that number is in the form of home equity. Now, don’t get me wrong, home equity is a good thing to have. But it’s not liquid, which means it has little practical impact on your retirement lifestyle. If you have no plans to sell your home, it doesn’t matter whether you have a dollar or one million dollars in home equity. It’s essentially just a number on paper. Case in point: there are seniors with million-dollar paid off homes in the San Francisco area who are practically living on cat food. They’re technically millionaires, yet they’re barely scraping by on a meager Social Security income. Yes, home equity is great to have, but it has no impact on your retirement lifestyle unless you can convert it into cash.
In the past, there were just two ways to convert home equity into cash: 1) sell the home, or 2) get a “cash out” mortgage. The first option makes no sense if you want to continue living in your home. The second option, a “cash out” mortgage (including HELOCs), somewhat defeats the purpose of converting equity into cash. If your goal is to free up cash, it doesn’t make sense to add another payment to the financial picture.
The reverse mortgage was created to offer a third and better option. It was created to give seniors access to their largest asset – home equity – without selling or taking on a mortgage payment.
What Is a Reverse Mortgage?
The first and most important thing to understand is this: a reverse mortgage is simply a home loan. However, it’s a unique home loan designed to give you access to a portion of your home’s value without a mortgage payment and without giving up ownership of your home.
The most common reverse mortgage in the United States is the home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders). If somebody you know recently got a reverse mortgage, it’s likely they got a HECM.
The HECM program was created and signed into law by President Ronald Reagan as part of the Housing and Community Development Act of 1987. The HECM is overseen and regulated by the Federal Housing Administration (FHA) under the authority of the Department of Housing and Urban Development (HUD).
Over 50,000 HECMs are written every year in America today. That number is likely to grow in the future as more seniors learn about the reverse mortgage.
HECM Reverse Mortgage Basics
There is a lot of misinformation floating around about reverse mortgages. Let’s get some basic reverse mortgage information down first before we dig into some deeper topics later.
- The minimum qualifying age is 62. If you’re married, only one spouse needs to be at least 62. The younger spouse can qualify as an eligible non-borrowing spouse (NBS).
- No mortgage payments are required as long as at least one borrower or non-borrowing spouse is permanently living in the home, maintaining it, and paying the required property charges.
- You remain the owner of the home and you’re free to leave it to your heirs. Your heirs can keep the home by paying off or refinancing the reverse mortgage balance. If your heirs don’t want the home, they can choose to sell it. Once the home is sold, the reverse mortgage balance is paid off and the remaining equity goes to your heirs. If your heirs don’t want to keep the home or hassle with selling it, the lender will sell it for market value (as documented by an appraisal). Any remaining equity goes into your estate once the reverse mortgage is paid off.
- The HECM is non recourse. The most that will ever have to be repaid is the value of the home. FHA will cover the shortage if the home isn’t worth enough to pay off the entire balance.
- HECM proceeds are not subject to income taxes. Because there is an expectation of repayment at some point, HECM proceeds are not subject to income taxes.
- HECM proceeds have no impact on Social Security retirement or Medicare benefits. However, proceeds can potentially impact Medicaid and Social Security disability benefits. If you receive these benefits, be sure to research how a reverse mortgage could affect them.
Common Myths and Misconceptions
Unfortunately, much of the reverse mortgage information you’ve probably heard is based on myths and misconceptions. Many seniors miss out on the great benefits of a reverse mortgage because they get scared by the things they’ve heard. The following summarizes the most common myths and misconceptions you may have heard:
“I’m giving up ownership of my home.” Not at all. A reverse mortgage is simply a home loan. You always retain title ownership of the home.
“The reverse mortgage is only for broke and desperate people.” Not at all. In fact, many so-called broke or desperate people often don’t even qualify. Many wealthy people take advantage of a reverse mortgage because it gives them additional cash management options they wouldn’t otherwise have.
“The reverse mortgage will use up all of my equity.” Not necessarily. It’s true that the reverse mortgage converts equity into cash, which means your loan balance rises over time. However, it’s also designed to preserve equity. Remember, the reverse mortgage is non-recourse. If your home isn’t worth enough to cover the entire balance, FHA covers the shortage. Obviously, the HECM is not a financially viable program if it uses up your equity quickly because FHA would end up covering a lot of shortages.
“I’ll be leaving a big debt to my heirs.” Again, the reverse mortgage is non-recourse, which means that a debt can never be passed on to your heirs. If there’s not enough value in the home to pay off the entire balance, you or your heirs are not responsible to cover the shortage.
“Reverse mortgage interest rates are sky high.” Not at all. In fact, HECM reverse mortgage rates are often very comparable to traditional mortgage rates.
“The fees are really expensive.” This is true sometimes, but not all the time. If you live in a high value home, it’s possible the fees can be steep because of the IMIP charged by FHA. However, the fees are not typically paid out of pocket. The exception is HECM for purchase, in which case the fees are paid as part of your down payment.
“The bank takes my house when I die.” Not at all. You are always the owner and you’re free to leave the home to whomever you wish. If your heirs wish to keep the home, they can either pay off or refinance the balance. If they don’t wish to keep the home or mess with selling it, the bank will sell the home and pay back the reverse mortgage balance. Any remaining equity goes into your estate and to your heirs.
“I can’t take any long trips or temporarily go into a nursing home or I might lose my house.” Not at all. Yes, you need to live in the home, but you can still take a long trip or staying in a nursing home for a few months and remain in good standing. As long as you live in the home at least part of the year and it remains your primary residence (not a second home or rental), you have met the residency requirements of the program.
“I can’t ever sell my house. I’m locked in for the rest of my life.” Not at all. The reverse mortgage is better suited for people who don’t plan to sell anytime soon. However, if circumstances change and you need to sell, you can. You simply sell the home, pay off the balance with the proceeds of the sale, and the remaining equity is yours to keep. The HECM has no prepayment penalty, either.
From My HECM. Reverse Mortgage information for 2022 is brought to you by Scott Underwood and Reverse Mortgage Alabama. Serving Alabama, Georgia, Mississippi, Tennessee.