Table of Contents (Updated how a reverse mortgage loan works in 2016).
A) HECM Reverse Mortgages & How They Work
B) Intro/Basics of the HECM Reverse Mortgage
C) Steps Involved and Process of Reverse Mortgage Loan
D) Questions, Opinions, Tips on How The HECM Works
A) Reverse Mortgages How They Work For Qualified Seniors
Reverse mortgages are currently the only mortgage solution for seniors to access their home’s equity without having to sell the home and or make a monthly mortgage payment. Currently the HECM reverse mortgage loan does not require seniors to have good credit scores or income (there are some upcoming changes which are going to make it harder for seniors to qualify into the program so now is a good time to consider a reverse mortgage if your credit scores or income or not very high).
Seniors who are curious about the reverse need to know that the HECM reverse mortgage is a safe government insured mortgage program for seniors. It was initially launched in the 1960s but just recently there has been explosive growth and attention to this retirement option for seniors (some 100,000+ seniors took a reverse mortgage in 2009 year).
Why has so many seniors over the age of 62 flocked to this program in the recent years:
The answer lies in the pros of the program that far outweigh any of the negatives or myths displayed in the media.
- You can pay off your existing mortgage and/or any other debts through your equity in the home.
- You keep ownership of the home through using the program (the bank will not own your home).
- You can retire without any further monthly mortgage payment obligations (just keep property taxes and homeowner’s insurance current.
- You can select how you want to receive your equity income (never taxed – no risk of not receiving the funds since its gov. insured – select between monthly income, lump sum, credit line, or combination for life)
- Any current/future equity is yours (if your home increases in value that is your equity) *similar to how any other mortgage works*.
- The home can be left for your children/heirs – and if the home loses value they won’t be responsible to pay back the outstanding debt (they can walk away the loan is a non-recourse one the federal insurance kicks in a pays the lender while not charging a dime to your heirs.)
- HECM reverse mortgage is federally insured to protect you from lenders and market conditions (no risk of default from lenders as it is a government backed loan.
If you have already paid off your mortgage loan, then the reverse mortgage is a safe government insured solution to increase your retirement income (or to build a retirement nest egg) – much like an annuity: you can receive a lifetime monthly income, select to receive a lump sum, or obtain a credit line payment from the lender/bank.
No other mortgage program has been designed for seniors in or near retirement, thus leading to confusion in the media. Seniors need to be aware of how the HECM program actually works – it is not a new program or a scam but instead a very well designed government insured loan that allows seniors to simply borrow money now from the homes equity but without payments (this has led to HECM myths or misconceptions).
“The reverse mortgage program is allowing many seniors to retire once and for all without having to worry about a mortgage payment/moving/renting out a room. The program has gone through many changes recently to improve and will continue to do so to keep the program viable for many more decades. As more and more seniors are interested in this option, the government is making it harder to receive them so we do urge seniors to consider their options now while the program does not call for income or credit scores as many of the seniors who need it the most are the ones who will not be able to qualify in the future.”
B) Reverse Mortgage Introduction
What is a reverse mortgage? – HECM home mortgage loan specifically designed for seniors who want/need to release equity from their home to help fund their retirement, without having to sell the home or having to make mandatory monthly mortgage payments.
Who Can Qualify For a Reverse Mortgage
Must be at least 62 or older to qualify *if your spouse is under 62 you may still qualify*
Own a home (you must must reside 183 days out of the year in that home) *those with mortgage balances qualify depending on how much equity is available)
Have equity in the home (equity is the difference between what you owe and what the home can appraise for)
Never have defaulted on any government debts in the past
For mobile/manufactured homes qualify click here to learn more
*** HUD has approved the ability for lenders/banks to check over your financial position (reviewing your credit scores and income, mortgage taxes/insurance payment history)
MetLife is now the first bank to review all of the above – this makes it tougher for you to qualify
*** We are currently able to match you to lenders who lend nationwide without having to go through income or credit checks – which usually means lower rates and bigger savings for seniors when compared to other lenders.***
Benefits & Disadvantages
What are the Benefits of an HECM reverse mortgage?
· Keep ownership of the property
· Never have another mortgage payment
· Income is tax-free (proceeds/funds you receive are tax-free)
· Select how you want to receive your income (monthly, lump sum, line of equity, or combination)
· You can sell home at any time
· You can leave home for children/heirs (any current or future equity is yours)
· You are not at risk for foreclosures since no mortgage payments due (you are still required to pay for maintenance, property taxes, and homeowners insurance as this could lead to a technical foreclosure)
· Low reverse mortgage rates (current rates are low and this is great news – with home price appreciation alone it will offset most of the cost of the loan)
· If you own a mobile/manufactured home, you can qualify for HECM loan (manufactured homes HECM)
What are the Disadvantages to the HECM reverse mortgage?
· Mortgage insurance premium charged by FHA – the program has a upfront insurance premium to protect both lender/borrower and this adds costs to the loan closing fees – you will pay 2% upfront for HECM Standard and .01% for HECM Saver
· This is a loan – the amount of money which would regularly be due as a payment is going to accrue onto the loan; however, when home prices increase this will offset it
· Many banks/lenders are now making it tougher to qualify for the reverse loan by introducing income/credit score requirements
· There are out of pocket reverse mortgage fees involved roughly $500-$600. Some seniors who have to make home repairs can include the costs into the loan.
“How does a reverse mortgage work lets dive deeper into the different types of reverse loans”
Seniors who qualify and understand how the program works for them should consider the different options of reverse mortgages.
1.) HECM Standard Fixed – the most popular option of the HECM loan is the standard fixed – which provides seniors with a fixed rate reverse mortgage (the interest rate never changes) also this is the best option for those who want the maximum amount of equity out of their homes – through the lump sum.
2.) HECM Standard Adjustable – another popular option since it provides maximum equity to be taken out but with an adjustable interest rates – for some specially those who need the program for short term the adjustable rates are extremely low and are the right choice – you can select a monthly income, credit line, or a combination to receive the equity. There is an interest cap on these loans so you are protected from it increasing too high.
3.) HECM Saver Fixed – the saver program is perfect for those who don’t need the entire amount of equity, therefore the mortgage insurance premium charged by FHA is significantly less, which causes closing costs to be less. You can select a fixed rate for this option and receive either a credit line or monthly income for life.
4.) HECM Saver Adjustable – if you are comfortable with an adjustable rate mortgage and with releasing less equity than with a standard reverse mortgage this program might be for you – you can reduce closing cost since its a saver program.
HECM Saver Mortgage How They Work – Introduced in October 2010 the HECM saver option makes the reverse mortgage more accessible by having a reduced mortgage insurance premium – the HECM upfront fees are 2%, but with the saver options introduced borrowers can pay a mip of only .01% thus savings thousands in upfront mortgage insurance costs. (The saver option only comes with adjustable rates so they are not for everyone – also the amount you can receive is a smaller % of the home’s equity- the main reverse benefits are the same (no repayment – keep ownership).
An example to illustrate the savings that come with the HECM Saver
With a $300,000 reverse mortgage loan you would pay the following in mortgage insurance premium
HECM (regular) – $6,000 mortgage insurance premium or 2% upfront in MIP
HECM (Saver) – $30 in mortgage insurance premium or .01% upfront in MIP
FACTORS TO CONSIDER
Most important factors of the reverse mortgage loan
Reverse mortgage interest rates – rates determine your cost of borrowing (lowest HECM rates), they will be crucial when comparing quotes from different lenders, and impact the amount you can receive, also important to consider an adjustable rate vs.. fixed rate programs.
Equity – how much equity do you have available – what is going to be the best way to use this equity in your retirement – do you believe that your home can appreciate at a faster pace then the amount of interest due on the reverse loan. These are all important questions to take into factor – the more equity you have the more you will receive – and for many their home is the most important so we work hard to structure the HECM so you maximize the value from your current equity – the HECM can protect your equity in bad economic times and also improve your cash flow by eliminating the mortgage.
Your age – the lenders will restrict the amount of equity you receive depending on your age – but you also need to do a financial analysis based on your age with a financial adviser to estimate the amount of funds you need in your retirement – the older you are the more equity you can take out – taking a reverse mortgage at 62 is perfectly fine and those who use the funds to re-invest can take higher risks than an 80 year old which can offset the costs of this HECM option.
Your retirement goals – what are you trying to accomplish? Is this a short solution to your problems or do you need a way to fund your retirement long term. The HECM program is flexible and depending on your equity and age we can help you create a well-rounded plan.
Reverse mortgages were designed for seniors, it is very important in retirement for senior homeowners over the age of 62 to eliminate their debts (both mortgages and unsecured loans), and to have a steady income ( or large savings in case of emergency/rainy day’s). The reverse loan will allow seniors to not only eliminate their debts, but also to have a home, be independent, and have enough income to retire (you select how you want to receive the proceeds).
**You are responsible for and should budget for the property taxes, insurance, and maintenance with every reverse mortgage option.**
C) What are the typical steps involved in getting a reverse mortgage loan?
1. Free phone consultation (888-975-13677) we explain to you all the in’s & out’s and we make sure you understand and can qualify for the program
2. Receive a competitive loan offer after we review the market (in under 24 hours)
3. If you decide to proceed you will have to pay for a mandatory HUD counseling session and an appraisal of your home.
4. Closing – it can take up to 4 weeks before your completed from start to finish, some lenders/banks sometimes take up to 2-3 months.
D) Questions, opinions, tips on how the HECM reverse mortgages work
Below is a collection of the most popular questions we receive the answers will further explain how HECM can benefit you in retirement.
Will I have to make a mortgage payment – what are my responsibilities after I receive a reverse mortgage loan?
No, you will not have to make another mortgage payment once you receive a reverse loan – you will pay for taxes, insurance and maintenance.
How much money can I receive or qualify for with a HECM reverse?
If you qualify, your age and equity available are the main factors you can get an estimate by going to our reverse mortgage calculator .
How much equity do I need? What if I have an existing first or second mortgage?
The more equity you have the better position you are in – you need at least to have some 35% equity available – if you have a first mortgage we need enough equity to be able to pay it off (lenders don’t lend 100% of the property value – so equity is essential)
Does the bank own the home – or do I keep ownership?
You keep ownership not the bank/lender – your name is on the title.
Is my credit, income, or mortgage payment history important factors to being able to qualify?
Some lenders will review your income, credit scores, and other factors such as (mortgage, tax, insurance payment history – BK foreclosures) we currently have lenders who are don’t take this into consideration.
What are the disadvantages reverse mortgage?
1.) The main disadvantage is that the program is ultimately a loan (this is not a grant or free gov. money). While there are no monthly payments made while the borrowers live in the home upon death, move, sale the loan comes due – ultimately less equity will be available for heirs.
2.) Age restriction – many are not old enough to qualify with HUD approving lenders the ability to do financial underwriting many will not qualify.
3.) High Closing costs – this used to be the case but now with the HECM saver reverse mortgage you can save substantially – also our job is to compare the market to save you both time and money.
Will the reverse mortgage work for those with bad or negative credit?
Currently we are not reviewing your credit scores, income HUD approved the ability for lenders to review your financial position MetLife is the first lender who will take your credit, income, previous taxes and mortgage history into play to determine if you qualify.
What happens if one of the borrowers in under the age of 62?
You can still qualify – it becomes riskier to have only 1 borrower on the loan as your spouse could be liable if the loan comes due – if something happens to the borrower on the reverse mortgage (also with new stricter guidelines could be tougher to qualify as with one income/credit scores).
How does the bank/lender make money if there are no mortgage payments?
Banks/lenders are paid according to the reverse mortgage rates charged they make their money when the loan is repaid (when you pass or decide to move out or sell the home).
What about manufactured homes reverse mortgages do they exist
Yes, while many lenders are not lending to manufactured homes we are able to – click here to learn more -> mobile manufactured HECM reverse mortgage
Recap of How the Reverse Mortgage Program Works
Reverse mortgages allow seniors to access a significant percentage of the equity in their home, with easy terms on qualifying. The Most attractive feature of Reverse Mortgage Home Loans, is that no Principal or interest payments are required by both borrowers while they are alive, instead the interest expense on the loan is simply added to the balance of the loan for as long as the homeowners live. With financial relief like this, it’s no wonder why more than 100,000 seniors just like you have taken a reverse mortgage in the last year alone.
We encourage you to keep learning and to use our free service so you can save both time and money by comparison shopping the reverse mortgage market
Some of you may be wondering what a Reverse Mortgage is and the answer to that question is very simple.
A Reverse Mortgage is basically a different type of FHA home loan. The Reverse Mortgage program is only for homeowners age 62 and above. The purpose of the Reverse Mortgage program is to provide several options to qualified homeowners in order to maintain a quality life. Reverse Mortgages are the types of Home loans that do not require principal or interest payments, instead the interest expense of the loan is simply added to the mortgage balance for the remainder of the life of the home – owners. Legally, the reverse mortgage closes in your name, you still own the home throughout your entire life and because the home is titled in your name, the only financial obligation you have is the basic maintenance, the insurance and Taxes on the property. Finally upon the death of the survivor of husband and wife, anyone with a valid claim to the estate is given the choice to either refinance or sell the property and take any remaining equity.
What you need to do is exactly what you are doing now, which is educating yourself on how the Reverse Mortgage program works, the next step is to familiarize yourself with the program options you qualify for and determine which options are suitable for you and your family. Once you have chosen a program, you will want to get a quote in writing or via e-mail.
A quote will give you a much more accurate estimate of the real dollars you are eligible for as well as a detailed breakdown of the closing costs. A quote will also provide you a direct link to a certified agent that can answer all your additional questions properly.
If you have any questions or are interested in knowing what your Reverse Mortgage options are, please feel free to contact us on our toll-free phone number during Eastern time office hours.
The two main concerns regarding a Reverse Mortgages are:
A) The financial obligation of homeowner
The only financial obligation to homeowners after closing on a Reverse Mortgage is basic property maintenance as well as the Tax expense and required property insurance.
If you are concerned with providing your children or grandchildren with as much of an inheritance as possible, you will probably find the Credit Line or monthly payment program more of a suitable decision for you and your family.
If you have enough equity in your property, a Credit-Line will allow you access to emergency funds in the event your home needs repair or to help a relative in need of financial help. The credit line also allows you the option to only take what you need when you need it (you’re not obligated to borrow any min. amount your in control) so more money can be left to your family when your life ends.
With the monthly payment option, what is owed on your home aside from any money that was used to pay-off your original mortgage if you have a mortgage, is simply the sum of the monthly payments you have taken before your life ends and the interest expense of the monthly payments.
Both the Credit line and monthly payment Reverse Mortgage Programs provide the most sensitive options for homeowners concerned with the inheritance issues of their Estate.