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Reverse Mortgages: Clearing Up Common Questions and Misconceptions

Heard all of the myths and misconceptions and now you have arrived here with reverse mortgage questions to help you understand the product more? We have you covered!

Reverse mortgage loans have a bad reputation, which can hold back those who could benefit from considering them. However, today’s Reverse Mortgages are different from the past, and they can offer solutions to many of the financial challenges retirees face.

reverse mortgage questions

This article aims to help you understand some common and uncommon reverse mortgage questions. By learning the facts, you will have a clearer picture of whether a Reverse Mortgage may be right for you, a loved one, or someone you advise.

It is worth noting that most, but not all, Reverse Mortgages today are Home Equity Conversion Mortgages (HECMs), which are the only Reverse Mortgages insured by the Federal Housing Administration (FHA). This article refers only to HECM Reverse Mortgages.

  1. What is a Reverse Mortgage, and how does it work?

A Reverse Mortgage is a home-secured loan that enables homeowners aged 62 or older to convert a percentage of their home equity into cash, fixed monthly advances, or a line of credit. The lender pays the borrower an advance on their home equity, and the borrower continues to live in and own the home. Unlike other types of home loans, the borrower is not required to make any monthly principal and interest mortgage payments. They can defer repayment of the loan balance as long as they live in the home, maintain it, and pay the property charges, such as taxes and insurance.

Since most people defer repayment of their Reverse Mortgage loan balance for the life of the loan, the loan balance usually increases over time as interest and fees get tacked on.

  1. What are common uses for a Reverse Mortgage?

Many homeowners use Reverse Mortgages to their advantage, from the cash-strapped to the very affluent. Some common uses include refinancing a traditional mortgage, paying for in-home care or Long-Term Care Insurance, financial planning, establishing a rainy-day fund, and lifestyle enhancement.

  1. What are the basic qualifications?

To be eligible for a Reverse Mortgage, the prospective borrower must be the homeowner, own the property outright, or have significant equity, live in the home as a primary residence, and meet minimum credit and income requirements. The property must be a single-family residence, a 2- to 4-unit property (where the borrower occupies one unit), a townhome, a HUD-approved condominium project, a single-unit approval condo unit, a planned unit development, a modular home, or a manufactured home that meets FHA requirements.

  1. How much loan proceeds can I expect to get?

The amount of loan proceeds a borrower gets depends on the age of the youngest borrower, the expected interest rate on the loan, and the lesser of the home value or the HECM limit. Generally, a younger borrower, a higher expected rate, and a lower-value home will have a lower principal limit than an older borrower, a lower expected rate, and a higher-value home.

  1. Do I have to pay taxes on the loan proceeds I receive?

Drawing funds from home equity, such as from a Reverse Mortgage loan, is not a taxable event. By drawing part of your monthly cash flow from home equity, you may be able to keep your adjusted gross income low.

  1. What are the ways I can receive the payout of my loan proceeds?

Borrowers can receive a payout from the Reverse Mortgage in a single-disbursement, lump-sum payment at closing, fixed monthly advances (either for a set number of months or for the life of the loan), a line of credit to draw from as needed, or both fixed monthly advances and a line of credit.

  1. Do I have to pay property taxes with a Reverse Mortgage?

Yes, the borrower must live in the home as their primary residence and pay the critical property charges, such as taxes and insurance.

  1. When do Reverse Mortgages become due and payable? How is the debt typically satisfied?

The loan typically becomes due and payable when the last surviving borrower permanently moves out of the home or passes away. If an eligible non-borrowing spouse is still living in the home, the due and payable status of the loan may be deferred (applies only when the last borrower moves out of the home because of death or mental or physical illness).

The loan can also become due and payable if the borrower(s) does not fulfill his or her obligations under the terms of the loan, such as failing to pay the property taxes, insurance, or other charges.  Note, this is the same for ALL loans; not simply Reverse Mortgages.  At loan maturity, the sale of the home will always satisfy the loan, even if the loan balance exceeds the value of the home. This is because all Reverse Mortgages are non-recourse loans — the home stands for the debt, and neither the borrowers nor their heirs can be held personally liable for any balance deficiencies at the time of loan maturity. If the home sells for more than the loan balance, the borrowers or heirs can pocket the difference.

  1. What options do heirs have who inherit a Reverse-mortgaged home?

If your heirs want to keep the house, they can pay off or refinance the loan balance or purchase the home with a short payoff of 95 percent of the appraised value of the home.

If your heirs do not want to keep the home, they can sell the home and keep any profit. If the loan balance is more than the home is worth, they can sign a deed-in-lieu of foreclosure, which allows them to walk away from the home and not be stuck with a bill.

  1. Is a Reverse Mortgage borrower required to pay MIP?

Yes, similar to other FHA loans, with a HECM Reverse Mortgage you are required to pay up-front MIP (mortgage insurance premium).  MIP equates to 2% of the lesser of the home’s value or the 2023 HECM limit of $1,089,300, as well as an annual MIP, which is 0.5 percent of the outstanding loan balance on an annual basis.

These premiums are usually financed into the loan and not paid out of pocket. Their purpose is to fund the non-recourse feature, which protects you and your heirs from owing a bill if your loan balance is higher than what your home sells for when the loan matures.

  1. Can a Reverse Mortgage be used to purchase a new home?

Yes, you can generate the required home equity by bringing funds to closing — the remainder of the purchase price will be financed via the HECM loan.

The down payment money must come from your liquid assets (e.g., bank accounts, CDs, retirement accounts) or from the documented sale of other assets you may have (e.g., proceeds from the sale of your present home, for example).

Once the loan is established, the benefits and features are essentially the same as if you were to have refinanced a traditional mortgage on your existing home using a HECM.

  1. Do Reverse Mortgages have a fixed or adjustable interest rate?

Reverse Mortgage interest rates can vary by lender and whether you select a fixed or variable product. When the single-disbursement lump-sum payout option is selected, a fixed interest rate will apply. The variable interest rate, available when either the fixed monthly advances and/or line of credit payout option is chosen by the borrower, is composed of two parts: an index and a lender margin (both are stated in the mortgage contract).

  1. Will a Reverse Mortgage affect my government benefits?

If the government benefit is a means-tested benefit (an assessment of whether the individual has the means to live without the government benefit), then yes, Reverse Mortgage disbursements could impact individuals receiving the benefit. Medicaid is one such means-tested benefit — it’s based on state thresholds for income and/or assets. So large draws that are placed in a borrower’s bank account could jeopardize a Medicaid or other means-based government benefit.

Your Social Security and Medicare benefits will generally not be affected by disbursements from Reverse Mortgages. Regardless of how much you have in your bank account, you will still qualify for basic Social Security and Medicare.

  1. What consumer protections are in place to educate the borrowers on the product and ensure they have sufficient capacity and willingness to pay the required property charges?

The Department of Housing and Urban Development (HUD) has added layers of consumer protection to help ensure Reverse Mortgages are a sustainable solution for borrowers.

Counseling is required as part of Reverse Mortgage requirements.  The borrower and anyone on the deed of the home must attend a counseling session.  The main objectives of the counseling session are to make sure you fully understand the loan program and to help you determine if it is a good fit for you. Counseling is conducted by the U.S. Department of Housing and Urban Development (HUD)-approved independent third parties. The session can be done in person or over the phone. This safeguard makes sure the borrower is advised by someone other than the loan originator.

All borrowers and co-borrowers must attend the session — and there are other situations where others must attend as well, such as a Power of Attorney for an incompetent borrower. The borrower’s family members are also encouraged to attend.

A financial assessment is required as part of the Reverse Mortgage.  Unfortunately, a too-common occurrence prior to HECM program improvements made effective in 2015 was borrowers who would sometimes struggle to meet property charge obligations, like taxes and insurance.  Some failed to earmark a portion of the loan proceeds for property charge payments for their life expectancy.

This approach, obviously, could put the homeowner in jeopardy of eventually defaulting on the loan after they spend their loan proceeds. A consumer safeguard implemented in 2014 and effective in 2015 is that there must be a more detailed assessment for potential HECM borrowers to ensure they have a willingness and sufficient capacity to pay property taxes, homeowner’s insurance, maintenance and upkeep, and HOA dues.

  1. What is the best way to get started with a Reverse Mortgage?

The first step in getting started with a Reverse Mortgage is to do your research and gather as much information as possible. This can include speaking with a Reverse Mortgage Specialist, attending a counseling session, and using an online HECM loan proceeds calculator.

Once you have a good understanding of the product and how it works, you can begin the application process. This typically involves working with a reverse mortgage lender who will help you determine the best loan option for your needs, as well as guide you through the application and underwriting process.

Overall, a Reverse Mortgage can be an excellent financial solution for retirees who are looking to access their home equity and improve their cash flow. By doing your research and working with an experienced Reverse Mortgage lender, you can make an informed decision about whether a Reverse Mortgage is the right choice for you.

If you have any more reverse mortgage questions, don’t hesitate to reach out.

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