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Important Things to Know About Reverse Mortgages

Retirement is supposed to be spent relaxing with loved ones, golfing with lifelong friends, and spoiling the grandchildren. But with fixed incomes, inflation, and heavy medical expenses, your hard-earned, life-long savings may seem to suddenly disappear. In times of crisis, a reverse mortgage loan is one way many Americans are fighting back. Here at Best Company, we are determined to help you understand the benefits of a reverse mortgage and to make sure you are pointed in a direction you can trust and find peace of mind moving forward. You should know what a reverse mortgage entails, if you qualify, and what options you have.

What is a reverse mortgage?

A reverse mortgage is a government-established program to help people approaching retirement age to have a place to live and funds to support living expenses. When you pay the mortgage on your home, you are, in essence, buying part of your home back from the bank that loaned you the money. Once you have made all your mortgage payments, you own 100 percent equity in the home, meaning if you sold it you would keep 100 percent of the profit, minus paying the real estate agent.

What happens when someone has paid off their home, is retired, and suddenly falls on hard times? How does someone on a fixed income pay for their basic needs and unexpected expenses?

Reverse mortgage loans open up another source of retirement funds. This program makes it possible to trade the home equity you already own for cash. After you take out the money, you may continue to live in your house and never have to repay the loan to the company until you die or move. Once you die or move, you or your heirs will often sell the property in order to pay back the loan.

Do I qualify?

Individual requirements:

  • Must be 62 years old or older
  • Must own either all of their property or have a small mortgage payment
  • Must be the occupants’ primary residence
  • Must not be a delinquent on any federal debt
  • Must meet with an approved HECM counselor

Home requirements:

  • Homes must be single-family or live in a 1-4 unit home and occupy one of the units
  • Homes must be U.S. Department of Housing and Urban Development (HUD) approved condominium
  • Homes must meet Federal Housing Administration(FHA) requirements

What are my options?

There are several types of reverse mortgages someone can consider.

Home Equity Conversion Mortgage (HECM): This is the most basic reverse mortgage package. This program is probably also the safest option. Government regulations ensure that customers are protected within the HECM program.

Home Equity Conversion Mortgage for Purchase (H4P): This is similar to HECM. It is for those who want to buy a new home and use the equity they have from their old home by using a reverse mortgage. If you want to buy a new home, you can buy a new house with a higher down payment (which shouldn't be a problem if you decide to sell your old house) and then use the equity in your new house to get the reverse mortgage. People generally do this to buy a more expensive home, and then use part of the money they get from the existing mortgage to pay off the remaining balance on the new mortgage.

Proprietary Reverse Mortgages: Proprietary reverse mortgages are created specifically by reverse mortgage lenders to give different clients better rewards or incentives to join their company. Rather than using the traditional HECM program, these companies offer different incentives, pay plans, or rates to ensure you are getting the best deal for your situation. These deals can be great but do not have some of the same protections in place as the traditional HEMC model. To explore proprietary reverse mortgages in-depth, check out the company links.

How much money can I receive from a reverse mortgage?

The maximum amount someone can receive on a HECM is $679,650. Although this is also the most someone can receive in a mortgage loan. Many factors contribute to each individual’s case:

Value of home: The value of the home property is one of the biggest determining factors for the amount of money you can receive. Simply put, the bigger the house you have, the more money you can receive.

Age: The older you are, the more you can receive for your reverse mortgage. A 62-year-old will get less money than someone who is 90 years old.

Interest rates: Interest rates are ever-changing; ask your lender for the current interest rate. Rates are usually adjustable rates, but some reverse mortgage lenders offer fixed rates.

Choice of distribution: Though you have the option on how to receive the loan, some options can be better than others. A line of credit tends to give you the highest possible proceeds, but payments come overtime. A lump sum gives you the money faster, but fees may apply.

What fees are involved?

Almost all of the fees for HECM can be financed and paid from the proceeds of your loan. You will not have to pay for them upfront, but the amount available to you will be reduced.

Traditional fees: Those who get a reverse mortgage must be willing to pay property taxes, homeowners insurance, and home maintenance costs.

Origination fee: These vary, but they are all capped by the Federal Housing Administration so no one can go higher than these rates. Many mortgage lenders will give you rebates or deals, so these fees may be even less.

To calculate the maximum origination fee:

  1. If your home is under $125,000 the fee has a maximum cost of $2,500.
  2. If your home is between $125,000 and $200,000 the deal is 2 percent of the property.
  3. If your home is over $200,000, then the lender can charge 2 percent on the first $200,000 and then only 1 percent on anything over that.
  4. If you own a home that is $500,000, you would be charged 2 percent for the first $200,000 and then just 1 percent on the remaining $300,000.

Note: Maximum Origination Fee is $6,000
 
Reverse mortgage counseling fees: This fee is totally dependent on the counselor. You should always be informed of the price before setting up a meeting, but the price usually is around $125 dollars.

Third-party charges: Closing costs from third parties can include an appraisal, a title search and insurance, inspections, surveys, recording fees, mortgage taxes, credit checks, and other fees. These tend to cost between $1000 and $2000.

Servicing fees: These are fees that ensure you are keeping up with your insurance payments and other documents. It costs, at most, $35 a month, and may be added to the monthly interest rates.

How do I choose a reverse mortgage company?

You have many options to choose from when looking for the best fit. As you research, make sure to fully explore the different options that each company offers, the deals they are willing to make, and how willing they are to help you find comfort, security, and freedom.

Why do people get a reverse mortgage?

People get a reverse mortgage for many reasons. Traditionally, people over the age of 62 have used this as another retirement income along with social security. However, many people are tapping into their hard-earned assets in order to enjoy retirement more or to use that, almost, tax-free option to invest in something else.

Should I be considering a reverse mortgage?

If you qualify for this program, it is always wise to look into it. Whether you are financially struggling or are just looking to see how much money you could make, it is always smart to explore your options.

Are reverse mortgages worth it?

More and more people are understanding and utilizing reverse mortgages. Not only is it a program to help those who are financially unstable, but it may interest those who want to retire early, buy a new home, or plan to stay in their current residence until they pass away. For many people, their homes are a primary asset. This is one way to get money fast in order to pay for more immediate needs such as college for grandchildren or sudden health problems.

What happens if I move and have a reverse mortgage on a house?

The loan is not due back until the last living person on the loan moves or dies. At that point, many people sell the home to pay off the loan, and even if they can’t sell the home for as much as the loan was for, the FHA has policies in place to protect you and your family.

Why do people view reverse mortgages as bad?

Many people wonder why reverse mortgages have a negative connotation to them. The reason is simple: this option is often someone's last option to financial freedom. In many cases, they have run out of money and use this as their last form of income. Though this is true, many are now using reverse mortgages to free up assets, buy a nicer home, or enjoy retirement more.

What is the best reverse mortgage company?

Check out the companies that have clearly shown they have what it takes to be the best.