The ins and outs of a reverse mortgage loan: Is it right for you?
You've spent the last 30 years paying down your mortgage, raising your family and working hard. Perhaps you still have a balance on your mortgage or are carrying some high interest credit card balances. But now you are ready to retire, and it's time to take care of you — and your home may be the best way to ease your financial concerns.
If you are unsure whether you have the financial freedom to truly enjoy a happy retirement, a Home Equity Conversion Mortgage (HECM) – commonly known as a reverse mortgage loan – may be the ideal solution for you.
What Is a Reverse Mortgage Loan?
At its simplest, a reverse mortgage loan is a federally insured home loan that allows borrowers aged 62-plus to access their home equity to supplement their retirement income. Like their traditional cousins, reverse mortgage loans have financial obligations, requirements and qualifications, but repayment is structured differently. Whereas traditional loans require borrowers to make monthly loan repayments each month for a designated period of time, reverse mortgage loan borrowers aren't required to make monthly mortgage payments, so long as they pay property taxes, homeowner's insurance and comply with loan terms.1 Instead non-taxable loan proceeds are made available to the homeowner to use at their discretion: to pay off other expenses; to build up a financial buffer for future unanticipated expenses; or to plan for the retirement of their dreams.
How Can a Reverse Mortgage Help Me with Retirement Planning?
Below are just a few of the ways a reverse mortgage loan can help you.
- Eliminate monthly mortgage payments – rather than paying money to the lender each month, you receive funds to enhance your retirement savings. 1
- You remain the homeowner and stay in your home – you maintain ownership and the title to your home as long as you comply with all loan terms.
- How you spend the proceeds of the loan is up to you – every borrower is different, so choose the disbursement option that best suits your needs: full or partial lump sum, monthly payments, or a line of credit; you may even make penalty-free payments on the loan.
- Social Security, Medicare, your 401(k), and pension are not affected – because a reverse mortgage loan is considered a loan and not income, proceeds are not taxable. However, need-based benefits such as Medicaid and SSI may be affected.
How Do I Qualify for a Reverse Mortgage Loan?
There are just a few eligibility requirements to qualify for a reverse mortgage loan.
- Borrower must be aged 62 or older – these loans were designed to help seniors age in their own homes; the borrower's spouse, however, may be under 62.
- The borrower must own the home – your name must be on the title, and the mortgage should be fully paid, or have a low remaining mortgage balance (up to 50-55% of home's value).
- The home must be and remain the borrower's primary residence – you must live in the house for a minimum of six months per calendar year.
What Are My Obligations as a Borrower?
A reverse mortgage loan is a loan like any other, and there are terms that must be met by borrowers. For instance, you are responsible for paying your property taxes, homeowner's insurance, HOA (if applicable), and the home must be well maintained at all times. The loan only becomes due and payable when the borrower moves away, passes away, sells the home or defaults under these terms.
How Does the Government Regulate HECM Loans?
HECM mortgages are strictly regulated by the federal government and include consumer protections to increase your confidence in your financial stability during retirement.
- No pre-payment penalty – you can repay your loan at any time without incurring additional costs.
- It is a non-recourse loan – the home is the only collateral that the lender may access for loan payoff; if the sale of the home does not cover the entire loan balance, the FHA pays the difference, not the borrower's heirs.
- Third-party counseling is required – before you can apply for a reverse mortgage loan, you must participate in a counseling session with a HUD-approved counselor.
- A financial assessment will be conducted – to make the HECM an even safer loan product, lenders thoroughly assess borrowers for their ability to meet loan obligations.
- Limit out-of-pocket fees – you will pay closing costs, lending fees, applicable interest rates and other common loan origination fees, but can roll many of these fees into the loan itself.
How Do I Apply for a Reverse Mortgage?
The process to apply for a reverse mortgage can be completed in just four simple steps.
- Understand how a reverse mortgage loan works – allot as much time as you need to explore this step.
- Consult with a HUD-approved counselor and begin the application process – counseling sessions and application duration vary, but allow approximately 30 minutes for each step.
- Schedule a home appraisal – on average you can plan approximately two weeks between scheduling the appointment and the appraisal itself.
- Finalize the process – if your loan is approved, allow 72 hours to complete the process and sign closing documents.
Today's reverse mortgage loans are safer than ever. Designed to help seniors enjoy their golden years by eliminating many of the financial concerns retirees face, these loans offer numerous protections for those who wish to enjoy financial independence.
Carefully review the information included in this article, and take the time to determine if a reverse mortgage loan is right for you. Depending on your unique needs, this may be the answer to your retirement financial planning needs — as it has been for more than 1 million other borrowers2 interested in aging in place, finishing out their retirements in their own homes, and remaining empowered and independent near loved ones and community connections.
1.If you qualify and your loan is approved, a HECM Reverse Mortgage must pay off your existing mortgage(s). With a HECM/Reverse Mortgage, no monthly mortgage payment is required. Borrowers must continue to pay taxes, insurance, and home maintenance as well as comply with loan terms in order to avoid foreclosure.**Consult your financial advisor.
2.The National Reverse Mortgage Lenders Association, November 1, 2016