#186: Using a reverse mortgage to reduce tax on Social Security benefits
By: John Metcalf
June 5, 2024
APRIL 15 STARK REMINDER FOR RECENT RETIREES
After retiring at the end of 2022 (at the age of 67), you began collecting Social Security benefits in 2023. Your wife retired at the end of last year, but she is not quite of age to qualify for a full benefit. Your plan was to wait until October of this year to “turn on” her “Social Security spigot”. Preparing your 2023 tax return, though, was a wake-up call, as you realized just how much of your own Social Security is being lost to taxes.
Your home is fully paid for and has been kept in good shape. Still, continuing past this year to defer your wife’s Social Security benefits would mean taking more money out of both your rollover accounts (which would trigger tax as well!). A couple of years ago, you inherited a piece of property, which could eventually be sold, but that would still not provide enough to allow deferring Social Security for very long. Is a mortgage line of credit on your residence your best option, you wonder?
Using your housing wealth as a source of regular income in order to defer Social Security benefits can be an option. But rather than borrowing money in the form of a home equity line of credit on a traditional “forward” mortgage, consider using a reverse mortgage. That way, withdrawals will not generate taxable income, and there will be no need to repay the loan until you have either moved out of the home (or until you have both died). You, of course, retain the title to your home so long as you continue to maintain it and keep the property taxes and insurance paid.
Later, should you end up selling the inherited property you mentioned, you might wish to use the sale proceeds to “replenish” your reverse mortgage equity, which is always credited with growth at the same rate as the interest being charged on the outstanding loan balance. Meanwhile, as your wife continues to suspend her Social Security benefit payments, she will be earning delayed retirement credits, resulting in a higher ultimate monthly Social Security payout once she reaches age 70.
As Charles Rawl, CFP®, RICP® wrote in Kiplinger, “The intelligent use of a reverse mortgage, particularly a federally insured home equity conversion mortgage (HECM) line of credit, could extend an individual’s or couple’s retirement resources in a way that more traditional strategies cannot.”
That April 15 reminder you got of the tax on Social Security benefits? It might point your way to a savvy retirement income management plan based on your own home.
Readers, if you’d like to see what you might qualify for with a reverse mortgage in Indiana, or to download your Reverse Mortgage Guide Click Here(and scroll down).
#185: Using a reverse mortgage to settle back in the U.S.A
By: John Metcalf
May 13, 2024
BACK TO BUILDING HOUSING WEALTH IN THE GOOD OL’ USA
After close to thirty years working abroad as an international education consultant, at age 74, you’ve moved back to the U.S. to be closer to family. For the past year, you’ve been renting an apartment in Indianapolis, waiting for the right time and the right spot to build your “forever” (or at least “for the foreseeable future”) home. You’ve been talking to different builders and are just about ready to pull the trigger on a medium-priced site in a neighboring township community. You’re wavering on whether to purchase the home for cash, avoiding the need for mortgage payments. At the same time, you hate the idea of tying up so much of your capital.
Financing the purchase of your new home with a HECM-for-purchase reverse mortgage might allow you to tie up less of your capital while still avoiding monthly mortgage payments. Using a combination of your own funds and a government-insured loan, the HECM-for-purchase plan consolidates two financial transactions into one. You would be able to hold on to more of your own capital for other needs, and repayment can be deferred until such time as you no longer occupy the home.
Now back home in the USA, you’ll be preserving more of your liquid assets, all the while “building”, not only a new house itself, but, potentially, building housing wealth!
Readers, if you’d like to see what you might qualify for with a reverse mortgage in Indiana, or to download your Reverse Mortgage Guide Click Here(and scroll down).
#184: Using a reverse mortgage to help sibling
By: John Metcalf
May 13, 2024
HOUSING WEALTH ENABLES SIBLING CHIVALRY
While you have both been U.S. citizens for many years, some of your fondest childhood memories revolve around Brothers and Sisters Day in Canada. Fraternal twins, your brother and you have remained very close over the years. At age 68 and single with no children, you are still actively self-employed on a part-time basis; your brother and sister-in-law both retired from the school system three years ago.
Tragically, just last week, at your annual observance of Siblings Day (as it is called here in the States) you learned that the latest diagnosis of your brother’s long-standing medical issues is forcing some immediate decisions. While he does have Medicare and supplemental insurance, the bulk of the costs of the one treatment plan that appears to hold the most promise are probably not going to be covered.
Rather than offering to help the couple pay each medical bill as it arrives, you would like to make a one-time six-figure cash gift, opening an account in your brother-in-law’s and sister-in-law’s name from which they can draw funds as needed. The only issue is that the bulk of your own financial assets is in tax-deferred accounts (one IRA rollover account and the Solo 401k) to which you contribute out of earnings.
Consider using your housing wealth (as opposed to your tax-deferred investment accounts) as the source of funding for your generous gift to your sibling’s family to help them pay for non-insurance-covered medical treatments. Set up as a line of credit, a Home Equity Conversion Mortgage will allow you to either make the one-time gift you envisioned, or to periodically gift sums of money (as the costs of the treatment protocol become clearer), all without increasing your own income tax liability.
Far from the sibling rivalry that so often appears in families, in helping remove any financial barriers that might have prevented your twin from accessing the most advanced medical treatments for his condition, a reverse mortgage might well turn out to be the perfect vehicle for you to practice sibling chivalry!
Readers, if you’d like to see what you might qualify for with a reverse mortgage in Indiana, or to download your Reverse Mortgage Guide Click Here(and scroll down).
#183: Using a reverse mortgage to age in place – a new place!
By: John Metcalf
May 3, 2024
AGING IN PLACE, BUT NOT IN THE OLD PLACE
At the urging of your adult children (neither of whom lives in this state), you paid quite a number to check out senior living communities in and around the city. As a very socially active widow, it quickly became plain to you that you treasure your independent lifestyle and would not be happy in a community living environment. Having made the decision to “age in place” (you’ve been reading the AARP publications on the subject), you realized that your present “place”, while fully paid for and in good repair (not to mention holding many precious memories), is simply too large a property to contemplate maintaining in your later years. As you move into our mid-seventies, you envision living in a one-story home. One aspect of your prior planning is quite reassuring is that, years ago, you purchased a Long-Term Care policy that can be used to fund healthcare at home.
As you’ve come to realize, “aging in place” need not mean remaining in the “place” you now own, but could describe independent living in a smaller, less-maintenance-demanding home. While you have sufficient cash reserves to make a substantial down payment on a new home even before you’ve sold this one, you don’t want to continue maintaining two homes at once.
One way to ease the transition from a financial point of view is to apply for a HECM (Home Equity Conversion Mortgage) on your existing home, using the loan proceeds to finance the balance of the purchase price of your new “place”. When your existing home sells, the reverse mortgage loan will be repaid out of the proceeds. The HECM for Purchase does a sort of “double duty”, allowing you to buy the new home before you’ve sold the old, bypassing the need for you to pay two sets of closing costs.
As a socially active senior who, at the same time, treasures her privacy and independence, aging in place – but not in your old “place” could prove the best of both worlds!
Readers, if you’d like to see what you might qualify for with a reverse mortgage in Indiana, or to download your Reverse Mortgage Guide Click Here(and scroll down).
Borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.
#182: Using a reverse mortgage the old fashioned way
By: John Metcalf
Updated: May 3, 2024
REVERSE MORTGAGES – TOOLS AT BOTH ENDS OF THE SPECTRUM
As an advisor who deals primarily with high-net-worth individuals and couples, you’ve come to understand the many ways in which using housing wealth can help your clients preserve and grow their investment assets, avoiding wealth depletion through taxation or ill-timed withdrawals. Ironically, a recent conference breakout session on life settlements reminded you of the early – and still very valid – concept of reverse mortgages as tactics “of last resort. The presenter cited a chapter from The Wall Street Journal Complete Personal Finance Guidebook, in which author Jeff D. Opdyke acknowledges that, “People often get to a point in retirement where their income doesn’t meet their financial means.”
While your own career has been devoted to helping clients, through good planning and investment diversification, prepare for a financially secure retirement, treating both their housing wealth and their insurance policies as wealth enhancement and wealth protection tools, the breakout speaker and the Opdyke remarks called your attention to insurance and housing assets as basic support resources when life doesn’t work out as planned.
“There are two potential assets that retirees often overlook,” Opdyke writes – a home and a life insurance policy. “Both can provide a substantial income,” he points out, and both allow retirees to raise money for retirement expenses they might otherwise have a hard time covering or might have to ask their children to help them pay for.” What’s more, Opdyke points out, while life settlements involve selling one’s policy to investors, who become the beneficiaries upon the death of the insured, reverse mortgages do not involve ceding ownership of one’s property.
It’s interesting that, as James Burton observes in Wealth Professional Canada, “Reverse mortgages don’t immediately resonate with financial advisors because they are perceived to be reserved for a marketplace rooted in need.” In your case, having viewed reverse mortgages as tool for high-net worth investors, the breakout session you attended served as a reminder that reverse mortgages can be valuable tools at both ends of the spectrum.
Readers, if you’d like to see what you might qualify for with a reverse mortgage in Indiana, or to download your Reverse Mortgage Guide Click Here(and scroll down).
#181: Using a reverse mortgage to fund world travel
By: Kelly Daley
April 9, 2024
HOUSING WEALTH AS A BUCKET LIST BRACE
Because each of you has survived a near-death experience (a bout with cancer in her case, a serious injury in yours), you are determined, within the limits of prudence, to check certain items off your world travel bucket list in the early years of retirement, rather than waiting until later.
Your spouse, retired from her full-time position since last year, does part time consulting work. With your own official retirement set for the end of this calendar year; you already have a regular customer base for your part time business coaching service. The mortgage on your jointly owned residence has long been fully paid, and the home was remodeled when you married eight years ago.
Each of you has been married before; neither of you has children. While potential future health costs remain a major concern, you will each be covered by Medicare and a supplement. While your long term care policies would be unlikely to cover the total costs of future illness, you feel you’ve done what you can to prepare for the worst. Now you’re determined t make these next years “the best” they can be.
Consider setting up a reverse mortgage on your home as a “brace” against possible health costs in future years. With that “reserve fund” in place, you can use your current sources of income to start checking things off your world travel “bucket list” over the next few years. You’ll continue to own and occupy the home, of course, with no requirement to either borrow against the equity nor to make any payments.
“Repositioning resources” by using your housing wealth to “backload” resources in preparation for the later years of retirement can allow you to “frontload” the funding for your near-term adventuring.
Readers, if you’d like to see what you might qualify for with a reverse mortgage in Indiana, or to download your Reverse Mortgage Guide Click Here(and scroll down).
#180 Using a reverse mortgage as a buffer against a stock market downturn
By: Kelly Daley
April 5, 2024
HOPING TO CONTINUE CLIMBING, PREPARED IF THINGS GO THE OTHER WAY
With the bulk of your invested assets in tax-deferred accounts, you’re pleased with this year’s portfolio results. You’re also pleased not to have been forced to tap those accounts, managing living; expenses with a combination of income from part time work/consulting assignments, rents from some income producing property your spouse inherited, and regular withdrawals from a joint investment account. With your home paid for and in good repair, you anticipate being able to wait the four or five years until IRA withdrawals become mandatory.
You’re somewhat concerned (moving further towards the election and given the dangerous international climate), that if your joint portfolio were to decline significantly, you’d be forced to tap into those tax-deferred accounts after all. You’re considering moving at least a third of the money from the high growth profile to a more conservative mix of investments.
Without in any way attempting to predict the near-term – or longer term – direction of the markets, you might consider taking out a reverse mortgage loan on your primary residence, set up as an equity line of credit. That way, should your portfolio asset decline (in either the tax-deferred or the joint accounts), you might pause withdrawals, using tax-free* reverse mortgage withdrawals to “pay the bills”. That would allow you to continue deferring taxable withdrawals from the rollover accounts and avoid the need to sell assets that might have been affected by a stock market townturn.
With no need to make monthly mortgage payments** on the reverse mortgage loan, you can continue to take a longer-term view in making portfolio investment choices. Meanwhile, should the future investment performance be better than feared, you can stop tapping your housing wealth. The unused portion of your equity will be credited with growth at the same rate as the interest being charge on the outstanding loan balance.
By enlisting all your resources, rather than just the investment accounts, you can enjoy a buffer against possible stock market declines.
Readers, if you’d like to see what you might qualify for with a reverse mortgage in Indiana, or to download your Reverse Mortgage Guide Click Here(and scroll down).
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*Please consult a tax advisor. **Borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.
#179 Using a reverse mortgage to rebalance investment “diet”
By: Kelly Daley
Updated: April 1, 2024
USE AN OWNED ASSET TO DIVERSIFY INTO “LOANER” TERRITORY
As recent retirees who only recently attended an intense three-day investment seminar on portfolio allocation, you two are feeling yourselves in somewhat of a quandary. Not only does your combined portfolio consist of almost 85% equity (a category the speaker dubbed “owner investments”), but the greater portion of that equity consists of the stock of the company where you were both employed up until 2021. The happy news, of course, is that the growth in that stock has been phenomenal. With interest rates possibly going to decrease, changing to some “loaner” investments might be a good idea, you’ve concluded, but you are still reluctant to divest yourselves of the stock that has been so much a part of your lives.
In other aspects of your planning, you feel comfortable with your preparations, having filled out the 5 Wishes forms for your estate planning and making sure your home is in good shape, including a new hot water system and roof. The house is owned jointly and fully paid for.
It appears you’ve taken responsibility for planning your affairs as you begin the retirement phase of your lives. Without in any way offering investment allocation or legal advice, I might suggest that, as you make asset allocation decisions about “owner” and “loaner” investments, that you include the equity in your residence to be part of the planning.Right now your “housing wealth” represents an even greater allocation to the “owner” side of the “investment pie”. Rather than rebalancing your asset allocation by selling your existing stock holdings and purchasing “loaner investments” such as bonds, you might set up a non-recourse reverse mortgage loan on your home, which would represent a “loaner investment” in and of itself. Not only will there be no monthly mortgage payments due, but any unused portion of your equity will be credited with growth at the same rate as the interest being charged on the borrowed funds, “adding to” the “loaner” portion of your overall asset allocation.
In short, a reverse mortgage can help you use an “owned” asset to diversify into “loaner” investments.
Readers, if you’d like to see what you might qualify for with a reverse mortgage in Indiana, or to download your Reverse Mortgage Guide Click Here(and scroll down).
Borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees. David Garrison, NMLS ID 1595194. Mutual of Omaha Mortgage, Inc. dba Mutual of Omaha Reverse Mortgage, NMLS ID 1025894. 3131 Camino Del Rio N 1100, San Diego, CA 92108. Indiana-DFI Mortgage Lending License 43321. Michigan 1st Mortgage Broker/Lender/Servicer Registrant FR0022702. These materials are not from HUD or FHA and the document was not approved by HUD, FHA or any Government Agency. Subject to credit approval. For licensing information, go to:www.nmlsconsumeraccess.org Equal Housing Lender
The Complete Guide to Reverse Mortgages
By: John Metcalf
Updated: April 1, 2024
Homeowners who are near or in retirement often find themselves in need of additional funds. Whether they’re looking to increase their monthly income, cover a large project such as a home renovation, or have a line of credit they can draw from in case of emergency, accessing extra cash can be a challenge.
It’s not uncommon for older homeowners to have a large amount of their net worth tied up in the equity in their home.
This money can be accessed through products such as a Home Equity Loan or Home Equity Line of Credit (HELOC), but both options will need to be paid back in the form of monthly installments.
Retired homeowners may not be able to afford that or simply don’t want the additional costs in retirement.
A reverse mortgage is another option for accessing equity in a home. Not only does it eliminate any monthly mortgage payments, but it also gives homeowners a handful of options for how they would like to receive the cash.
This complete guide to reverse mortgages will walk you through everything you need to know about this unique financial tool.
Chapter 1: What is a Reverse Mortgage?
In this section, we cover all the basics of a reverse mortgage. This includes what it is, how it works, the rules and requirements, and more.
What is a Reverse Mortgage?
A reverse mortgage loan is a safe and secure financial product that allows homeowners who are 62 years of age or older a way to access the equity in their homes without taking on additional monthly payments.
The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA). We offer this type of reverse mortgage here at Mutual of Omaha Mortgage.
The HECM reverse mortgage is a loan just like a traditional mortgage, but instead of making monthly payments to a lender, it allows seniors to receive payments from the lender in the form of a lump sum, a line of credit, monthly payments, or a combination of the three.
The variety of ways that reverse mortgage funds can be disbursed means that it can help homeowners in various situations and with various needs. It is not a one-size-fits-all solution.
For example, it may provide a way for seniors to afford to retire in place, but it may also simply allow seniors to have additional financial freedom in retirement by providing them with funds to pay off credit card debt or make home renovations without having to tap into savings.
Let’s learn more about how a reverse mortgage loan works.
How Does a Reverse Mortgage Work?
A reverse mortgage loan converts a portion of your home’s equity into funds paid directly to you.
The amount of money you receive is based on the age of the youngest borrower, the market value of the home, and current interest rates. The total amount that borrowers receive from a HECM reverse mortgage typically ranges from 40 percent to 60 percent of the home’s value.
The FHA puts a lending limit each year on how much lenders can loan to reverse mortgage borrowers. The lending limit for 2024 is $1,149,825.
The older the homeowner, the higher the value of the home, and the lower the interest rate, the more you will be able to receive. Our reverse mortgage advisors will be able to provide you with more specifics about your individual situation.
The loan amount is also able to increase over time if your loan has a variable interest rate. The variable rate also gives you more options for how you may receive your money. Some of those options include:
Monthly payments as long as at least one of the borrowers continues to live in the home
Monthly payments for a fixed number of months
A line of credit
A line of credit combined with monthly payments
A lump sum disbursement combined with monthly payments
A lump sum disbursement combined with a line of credit
By comparison, if you choose a fixed interest rate, you will only be able to receive your funds in a one-time lump sum payment.
Mutual of Omaha Mortgage also offers a jumbo loan called the HomeSafe Reverse Mortgage that allows homeowners to access significantly more equity, for those who may qualify for more.
Homeowners are still required to pay property taxes, homeowner’s insurance, any homeowners association (HOA) fees (if you have them), and any costs necessary for maintaining the home.https://player.vimeo.com/video/617442458?h=1879c701e8&color=105fa8&title=0&byline=0&portrait=0
Reverse Mortgage Requirements and Rules
Not everyone can take out a reverse mortgage. Before applying, you should know about some basic reverse mortgage requirements.
In order to obtain and keep a reverse mortgage, the borrowers must agree to the following obligations:
To keep the home in good repair (as defined by the Federal Housing Administration, or FHA)
To pay property taxes
To pay homeowner’s insurance
To live in the property as their primary residence
Compared to a traditional mortgage, income, employment, or good credit are not required to be approved for a reverse mortgage.
At least one of the borrowers must be 62 years old or older
The property must be their primary residence
The home must have substantial equity built up
The property must be a single-family residence, an FHA-approved condominium, a townhouse, a manufactured home that meets certain requirements, or a two to four-unit property in which the borrowers occupy one of the units.
The home needs to be in good condition
The borrowers will need to show that they can continue to pay the property taxes, homeowners’ insurance, HOA fees, and maintenance costs.
If you have questions about whether you qualify, the best way to get all your questions answered is to talk to one of our reverse mortgage specialists by going here.
Reverse Mortgage Types
There are three types of reverse mortgages:
Home Equity Conversion Mortgage (HECM). The HECM reverse mortgage is the most common type of reverse mortgage offered by lenders. HECM loans are also federally insured mortgages. These reverse mortgage loans have an FHA lending limit of $1,149,825 for 2024.
Proprietary Reverse Mortgage. Many lenders will also offer proprietary reverse mortgages for those who have homes that are worth more than the FHA lending limit. These are typically jumbo loans that go by unique names. At Mutual of Omaha Mortgage, we offer the HomeSafe Reverse Mortgage, which allows homeowners to borrow up to $4 million.
Single-Purpose Reverse Mortgage. Homeowners obtain single-purpose reverse mortgages through state and local governments. In some cases, these loans are also offered through non-profit organizations. They may only be used for a single purpose that is lender-approved. Typically, a single-purpose reverse mortgage is used toward property taxes, home insurance premiums, home repairs, and renovations.
Most reverse mortgage lenders will offer the following reverse mortgages:
HECM Reverse Mortgage. This is the standard reverse mortgage product that is insured by the FHA. It pays off the current mortgage and gives homeowners cash as monthly payments, a lump sum, and/or a line of credit.
HECM for Purchase. A HECM for Purchase allows homeowners to use a reverse mortgage to buy a new home. This is a good option for homeowners who are looking to relocate and want the benefits of a reverse mortgage.
Jumbo Reverse Mortgage. If homeowners want or need more cash than what they are able to obtain through a traditional reverse mortgage, another option is a jumbo reverse mortgage.
An FHA-insured loan protects borrowers if the lender goes out of business or if the home’s value is not enough to cover the loan when it comes time to sell.
Chapter 2: How to Use a Reverse Mortgage
Now that you know the reverse mortgage basics, find out how much you might be able to get from a reverse mortgage, and what you can use a reverse mortgage for.
How Much Money Do You Get from a Reverse Mortgage?
The reverse mortgage loan amount that you can expect to receive is based on several factors, including:
The home value is based on a current home appraisal
Current interest rates
The age of the borrower(s)
The type of reverse mortgage
The FHA puts a lending limit on reverse mortgages. The current lending limit for an FHA-insured loan in 2024 is $1,149,825.
You can borrow beyond the FHA limit through lenders that offer jumbo loans that are not FHA-insured. At Mutual of Omaha Mortgage, this is known as our HomeSafe Reverse Mortgage.
A HECM calculator may provide homeowners with more specific numbers of what they might receive from a reverse mortgage.
How the money from a HECM loan is used is entirely up to the homeowner. However, here are some common ways homeowners have used their reverse mortgage proceeds:
Qualifying homeowners may also be able to use a reverse mortgage to purchase a new home. This is known as a reverse mortgage for purchase or HECM for purchase.
While some older homeowners want to retire in place, there is also a large share that wants to relocate in retirement. They may want to upsize, downsize, move to be closer to family, or move to a warmer climate. A HECM for purchase gives them that option without having to take on monthly mortgage payments.
This is how it works:
The homeowners will sell their current home.
The money they receive from the sale of that home will be used to make a large down payment (typically 50% to 60%) on the new home.
The remaining balance will be financed with a reverse mortgage.
Can You Use a Reverse Mortgage as a Retirement Tool?
A reverse mortgage used to be viewed as a financial product to turn to as a last resort, but that is no longer the case.Retirement planning experts are now recommending that older homeowners start looking at adding a reverse mortgage to their retirement portfolios earlier rather than later.
Here are some reasons to consider adding a reverse mortgage to your retirement portfolio:
Retirees are able to increase their cash flow by eliminating monthly mortgage payments.
A reverse mortgage can serve as a source of funds during an economic downturn so that retirees aren’t accessing their retirement investments when they are at a low. This is especially important now as we are experiencing record inflation.
If reverse mortgage borrowers opt to receive their funds as a line of credit, the money can be used to cover unplanned expenses.
Learn all about the costs and fees you can expect to pay as part of a reverse mortgage.
What are the Costs, Rates, and Fees of a Reverse Mortgage?
Interest Rates
There are two types of interest rates homeowners can expect with a reverse mortgage:
Fixed-rate mortgage. With a fixed-rate reverse mortgage, the interest rate will be the same throughout the life of the loan.
A variable-rate or adjustable-rate mortgage. A variable rate reverse mortgage has a change of up to 2% that happens periodically. However, the rate can never go up more than 5% over the starting rate due to a lifetime cap.
If a borrower decides to receive the funds from the loan as a lump sum payment, the loan will have a fixed rate.
If the money is received as monthly payments or a line of credit or some sort of combination of a lump sum, monthly payments, and a line of credit, the loan will have an adjustable rate.
Reverse mortgage interest rates work differently compared to traditional mortgages. For example, with a regular mortgage, your credit score will impact your interest rate. This is not the case with a reverse mortgage. With a reverse mortgage, your credit score neither affects your interest rate nor your ability to qualify for a reverse mortgage.
Costs and Fees
Just like traditional mortgages, reverse mortgages do come with costs and fees. These will vary with each lender, but these are the costs and fees homeowners can expect to pay:
Origination fees. These fees are paid to the lender, and they cannot be more than $6,000.
Closing costs. These costs are typically paid to third-party vendors and include fees for the following purposes: appraisals, recording fees, title searches, credit checks, surveys, mortgage taxes, inspections, and others.
Mortgage insurance premiums. These are charged when the loan is initiated and annually throughout the life of the loan. These charges go to the FHA, and they ensure that the homeowners receive their loan advances. It also helps make up the difference at the end of the loan to make sure the homeowner does not have to pay more than the property value. The annual premium is 0.5% of the loan’s balance.
Servicing fees. These fees are charged by the lender for servicing the loan. These fees cover the costs of sending monthly statements, distributing funds, and ensuring that the loan requirements are met throughout the life of the loan.
The fees and costs can be paid upfront or can be covered by the loan.
Homeowners must also continue to pay the costs necessary for maintaining the home, since the title remains in the homeowner’s name. These include property taxes, insurance, utilities, repairs, and anything else necessary to maintain the home.
Traditional mortgages typically come with 15-to-30-year terms in which borrowers must repay the loan. With a reverse mortgage, there is no set term length.
Reverse mortgage loans do not have to be repaid until the homeowner leaves the home permanently, whether it’s because he or she decides to sell the home, or the homeowner becomes deceased.
Chapter 4: Reverse Mortgage Application Process
Applying for a reverse mortgage is a unique process. In this section, we will cover all the steps you can expect when applying for a reverse mortgage.
What is the Reverse Mortgage Application Process?
The first thing to note about the reverse mortgage application process is that it is not fast. Obtaining the cash from a reverse mortgage can take up to 45 days.
While the exact process may vary from lender to lender, here’s a general rundown of the reverse mortgage loan process that a borrower can expect:
Step 1: Talk to a reverse mortgage advisor. In this step, homeowners will connect with a reverse mortgage professional for an initial discussion. They may receive an estimate of what they can get with a reverse mortgage.
Step 2: Meet with an independent counselor. This is a required step in order to officially file an application. Homeowners must meet with a third-party HUD-approved counselor who is not associated with the mortgage lender.
Step 3: Submit the application. In this step, the homeowners will complete the application and sign disclosures with the assistance of the reverse mortgage broker.
Step 4: Home appraisal. The home must undergo an appraisal to assess the condition and value of the home.
Step 5: Processing. In this step, the homeowners wait while the loan file is submitted for processing and underwriting. The reverse mortgage broker may come back to the homeowner with questions from the underwriter.
Step 6: Closing. Once the documents are processed and approved, a closing date will be scheduled to sign all necessary documents.
Step 7: Receive funds. After three business days, the funds will be released in the manner the homeowner chose when filing the application: a lump sum, a line of credit, monthly payments, or a combination of the three.
Right to Cancel
Homeowners can cancel a reverse mortgage at any time during the application and processing phase without facing penalties. This includes three business days after the closing documents are signed.
In order to cancel a reverse mortgage, it must be done in writing. The written request must also be sent by certified mail, and a return receipt needs to be requested.
After the cancellation request is made, the lender must return any money paid by the homeowners within 20 days.
It is recommended that homeowners keep all relevant documents and communications in case the cancellation is contested.
In this section, we dive into the pros and cons of a reverse mortgage. Understanding the pros and cons is also key to knowing if the reverse mortgage product is the right choice for you.
What are the Pros and Cons of a Reverse Mortgage?
Before applying for a reverse mortgage, homeowners should thoroughly weigh the pros and cons. Below are some of the pros and cons of a reverse mortgage.
Pros
Homeowners can retire in place
Homeowners are able to increase their cash flow in retirement
Homeowners are able to eliminate mortgage payments
Homeowners have several options for receiving funds
The reverse mortgage funds can be used at the homeowner’s discretion
Homeowners are able to receive other sources of income in addition to the reverse mortgage
Cons
Homeowners are unable to leave their homes free and clear to their heirs
Homeowners must continue to pay taxes, insurance, and maintain the home
Reverse mortgages typically come with high fees and closing costs
The balance of the loan increases over time
Chapter 6: Reverse Mortgage FAQs
In this section, we cover some common questions homeowners have about reverse mortgages.
Are Reverse Mortgage Payments Taxable?
The money received from a reverse mortgage is not taxable. Because the money received from a reverse mortgage is a “loan advance” and not income, it is not taxed.
How Do You Pay Off a Reverse Mortgage?
Unlike traditional mortgages, a reverse mortgage is not paid by making monthly mortgage payments.
Most reverse mortgages are paid off when the home is sold. The money made from selling the home is used to pay the loan balance.
Borrowers are allowed to make early payments without penalty if they want, but it is not required.
Who Owns the Home?
One common misconception about reverse mortgages is that the bank owns the home, but this is not the case.
The title continues to remain in the name of the borrower. In addition, the borrowers are still responsible for maintaining the home, paying the property taxes, paying for homeowners insurance, and any other costs such as utility expenses.
What Happens to a Reverse Mortgage When You Die?
One of the most common questions about a reverse mortgage is what happens to the reverse mortgage after a homeowner dies. If a homeowner with a reverse mortgage dies before selling the home, the heirs of the estate have two options:
Option One: They can sell the home, repay the loan balance, and keep any of the remaining equity.
Option Two: They can keep the home by repaying the loan, possibly by refinancing it into a new mortgage.
Because of the reverse mortgage’s non-recourse feature, the homeowners or their heirs will never owe more than 95% of the home’s appraised value, even if the balance of the loan exceeds this amount. This means that if the home appraises for less than the loan balance, 95% of that amount is all that needs to be repaid.
Are Heirs Responsible for Reverse Mortgage Debt?
The children or heirs of homeowners with a reverse mortgage are still able to inherit the house in the same way they would with a house with a traditional mortgage.
The decision that heirs will have to make is how to pay off the reverse mortgage loan. Typically, heirs will sell the home to pay back the lender. Any leftover money will go to the homeowner’s estate.
Because reverse mortgages have what is known as “non-recourse protection,” heirs will never have to pay the lender more than the value of the home.
Is a Reverse Mortgage a Scam?
While a reverse mortgage is a legitimate financial product, unfortunately, there are scammers out there trying to take advantage of eligible homeowners.
First, it’s good to be aware of some of the common scams out there that homeowners may run into:
VA Scams. Some scammers try to pose as workers for the Department of Veterans Affairs (VA). One way to know this is a scam is that the VA does not offer reverse mortgages. Some mortgage lenders offer special discounts for military members, but this does not mean the VA has any connection with the lender or the loan.
Contractor Scams. Homeowners should avoid contractors who try to pressure them into getting a reverse mortgage to pay for home repairs.
High-pressure sales tactics. Reverse mortgage brokers are there to educate and answer any questions that homeowners may have about HECM loans. Homeowners should avoid brokers that make them feel pressured into taking out the loan as well as how to spend the money, especially if the broker wants the homeowner to put the money into another financial product the broker will benefit from.
Second, another way to avoid a reverse mortgage scam is to ensure you are working with a reverse mortgage lender who has a good reputation among its customers and unbiased third-party review business review platforms such as the Better Business Bureau.
Chapter 7: Is a Reverse Mortgage Right for You?
If you meet all the requirements and you’re starting to see how a reverse mortgage may be the right option for you, the next step is to talk to one of our reverse mortgage specialists.
A reverse mortgage is not the right choice for everyone, but it may be a good option for those who are near or in retirement and find themselves in one or more of the following situations:
You have significant equity in your home, and you want to remain in the home for at least five years.
You don’t have enough retirement savings and need additional retirement income.
You will be able to continue to pay the property taxes, insurance, and other costs necessary for maintaining the home.
You want to have additional funds on hand that you can use toward unplanned expenses.
You are living on a fixed income such as Social Security and need to supplement your income.
Your home needs major upgrades or renovations.
You simply want more peace of mind.
And there may be many other reasons why homeowners may decide to pursue a reverse mortgage. Your reason for wanting a reverse mortgage is unique to you.
Before making this decision, it is recommended that you talk to your family members and financial advisor.
