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Frequently Asked Questions
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| What is a reverse mortgage?
A reverse mortgage is a loan that enables senior homeowners, age 62 and older, to convert part of their home equity into tax-free* income—without having to sell their home, give up title to it, or make monthly mortgage payments. The loan only becomes due when the last borrower (s) permanently leaves the home.
* Consult Tax Advisor. Not all products available in all states.
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| 2.
| What are the advantages of a reverse mortgage?
There are many. Here are a few of the most significant:
- Remain independent. A reverse mortgage allows you to remain in your home and retain home ownership.
- Stay in your home. It allows you to remain in your home and retain home ownership.
- No monthly mortgage payments. You need not pay back the reverse mortgage loan nor make any monthly mortgage payments until you permanently move out of the home.
- Tax-free money. Because the money you receive from a reverse mortgage is not considered income, it is tax-free* and will not affect your Social Security or Medicare benefits.
- Freedom and flexibility. The money you get from a reverse mortgage is yours to use in any way you choose.
* Consult Tax Advisor
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| 3.
| How do I qualify? What are the requirements and/or restrictions?
Qualifying is easy! You just need to be 62 or older and own a home with some equity. There are no income, health or credit qualifications. Bad credit is O. K. too, just as long as there are no current government liens against your home. If there are, those will need to be paid and can be done by using the loan proceeds.
Click here to have an MLS Mortgage Reverse Mortgage Specialist determine if your home will qualify.
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Can I do a reverse mortgage if I already have a mortgage on my home?
Yes, as long as the existing mortgage doesn't exceed approximately 50% - 75% of the home's value. If you already have a mortgage on your home, the reverse mortgage will payoff your existing mortgage. You will no longer have a mortgage payment for as long as you occupy your home as your primary residence. You may also be able to receive additional amount of cash at closing depending on the amount of the existing mortgage that is being paid off.
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| 5.
| What are the closing costs?
Like any loan, there are closing and other costs, all of which can be paid by your reverse mortgage with little to NO out of pocket costs to you.
Closing costs and expenses for reverse mortgages are higher than that of a standard mortgage. But here's an important thing to understand. The interest rate on a reverse mortgage is less than the rate of a forward mortgage. This is significant because, on average, 82% of the total loan cost is in the interest rate, not in the closing costs and fees. An additional item to understand is how long you plan on staying in your home. For instance, if your home appraised around $325,000, you may expect closing costs of about $15,000. That sounds like a high number for closing costs, but if you said you plan on staying in your home for about 10 years, the reverse mortgage will only have cost you about $125 per month.
Alternatively, if you anticipate moving in the short term, getting a reverse mortgage may not be right for you. The reason is because you can only spread those fees over a couple years, making the reverse mortgage too expensive.
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| 6.
| In what ways can I receive the money from a reverse mortgage?
You have several options in how you can receive the money from a reverse mortgage:
- You can choose to receive the money all at once, as a lump sum.
- You can receive equal monthly payments as long as one of the borrowers lives and continues to occupy the property as a principal residence.
- You can choose to receive equal monthly payments for a fixed period of months.
- You can get a line of credit*; which allows you to take funds at times and in amounts of your choosing until the line of credit is exhausted. This is the most popular option, chosen by more than 60% of reverse mortgage borrowers.
- You can opt for a combination of line of credit with monthly payments for as long as the borrower remains in the home.
- Or, finally, you can choose a combination of the above.
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| 7.
| What kind of reverse mortgages are available?
- Federally-insured reverse mortgages. Known as Home Equity Conversion Mortgages (HECM), they are insured by the U.S. Department of Housing and Urban Development (HUD). They are widely available, have no income requirements, and can be used for any purpose. (For more on HECM reverse mortgages, click here.)
- Government-sponsored reverse mortgages. Home Keeper® is Fannie Mae’s conventional market alternative to the Home Equity Conversion Mortgage (HECM). It is a government-sponsored enterprise program and works like a HECM loan in many ways. However, a Home Keeper® reverse mortgage addresses a few needs that are not met by HECM loans, such as individuals with higher property values, condominium owners, and seniors wishing to use a reverse mortgage to purchase a new home. (For more on Fannie Mae Home Keeper reverse mortgages, click here.)
- Proprietary reverse mortgages. An example of a proprietary reverse mortgage is the Financial Freedom Cash Account. click here to learn more).
To compare all three products, click here.
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| 8.
| What are the experts saying about reverse mortgages?
Many financial counselors, advisors, senior advocates and published reports suggest that a reverse mortgage can be a smart way to secure your financial future during retirement.
"This [reverse mortgage] can really come in handy; your home is not only something to live in, but something you can live on as well." - Suze Orman from her article entitled "Change The Prescription of Your Retirement Glasses."
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| 9.
| What if we want to leave our home to the kids? How will the reverse mortgage affect our estate? |
| When you sell your home or no longer use it for your primary residence, you or your estate must repay the lender for the cash received from the reverse mortgage, plus interest and service fees. Any remaining equity belongs to you or your heirs. It’s important to remember that you can never owe more than the home's appraised value when it is sold. None of your other assets will be affected by your reverse mortgage loan. Repayment may be accomplished by refinancing the reverse mortgage with a traditional "forward" mortgage loan, or through the use of other assets. |
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Will my heirs owe anything to the lender?
You heirs will be able to decide whether to keep the home or sell it. If they decide to keep the home, they must pay the balance due on the reverse mortgage. Otherwise, they may sell the home and use the proceeds to pay off the balance due on the reverse mortgage. They will get to keep any excess proceeds from the sale of the home.
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When must a reverse mortgage be repaid?
Your reverse mortgage loan becomes due and must be paid in full when one or more of the following conditions occurs: (a) the last surviving borrower passes away or sells the home; (b) all borrowers permanently move out of the home; (c) the last surviving borrower fails to live in the home for 12 consecutive months due to physical or mental illness; (d) you fail to pay property taxes or insurance; (e) you let the property deteriorate, beyond what is considered reasonable wear and tear, and do not correct the problems.
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Are fixed rate loans available?
Yes they are!
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Are there tax consequences? What about my Social Security and Medicare benefits?
Because reverse mortgages are considered loan advances and not income, the IRS considers them to be not taxable. Similarly, having a reverse mortgage should not affect your Social Security or Medicare benefits.
If you receive SSI, Medicaid, or other public assistance, your reverse mortgage loan advances are only counted as "liquid assets" if you keep them in an account past the end of the calendar month in which you receive them. You must be careful not to let your total liquid assets become greater than these programs allow. It may be wise to consult your tax advisor on this.
Another tax fact to bear in mind: interest on reverse mortgages is not deductible on your income tax returns until the loan is paid off entirely.
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How safe are reverse mortgages?
Reverse mortgages are sponsored by the U.S. Government through HUD. The fees and expenses that can be charged on a reverse mortgage are very closely regulated by HUD in order to protect the senior. Additionally, as a further protection, the U.S. Government requires the senior borrower to attend counseling through an independent counseling agency. |
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How common are reverse mortgages throughout the country?
For the last several years, the volume of reverse mortgages has been increasing by about 65% per year. Recently, the volume increased nearly 100% in 2004 over 2003. The popularity of reverse mortgages only continues to grow as more and more seniors learn about this invaluable tool they have at their disposal.
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If my home's value appreciates during the term of the reverse mortgage, am I entitled to that money?
Under a reverse mortgage, you or your heirs are only required to repay the outstanding balance of your loan. You or your heirs are entitled to any appreciation that is in excess of the outstanding loan balance. Additionally, reverse mortgages are non-recourse loans, which means you can never owe more than your home is worth.
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How long does the reverse mortgage process take? When should I expect my money?
Normally a reverse mortgage will take about 45- 60 days to close. You will receive your money on the fourth day after signing your final loan documents.
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How and why is the U.S. Government involved with reverse mortgages?
Reverse Mortgages are becoming popular in America. The U.S. Department of Housing and Urban Development (HUD) created one of the first. HUD's Reverse Mortgage is a federally-insured private loan, and it's a safe plan that can give older Americans greater financial security. Many seniors use it to supplement social security, meet unexpected medical expenses, make home improvements, and more.
HUD put in place two very important safeguards to protect seniors.
- Caps on fees and expenses - the interest rate and all fees associated with reverse mortgages have caps as a way of protecting seniors.
- Required counseling - HUD requires that anyone getting a reverse mortgage make sure it's right for them and that they understand reverse mortgages in their entirety by getting "counseling" from a non-profit, approved counseling agency.
The counseling usually takes 45 - 60 minutes and the senior is issued a counseling certificate. We suggest that if you have any children, close friends or trusted advisors that you take them with you to the counseling meeting.
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| What advise should I get before obtaining a reverse mortgage?
Meet with an unbiased counselor before completing your reverse mortgage application. This is a federally mandated feature of the reverse mortgage process and is designed for your protection. The counselor, who is from an independent government-approved housing counseling agency, explains in detail the pro's and con's of all your reverse mortgage alternatives. He or she will discuss a reverse mortgage’s costs and financial implications, should tell you about any government or nonprofit programs for which you may qualify, and advise you on any proprietary reverse mortgages that may be available in your area.
* A list of approved counseling agencies is posted on the Internet by the U.S. Department of Housing and Urban Development, at www.hud.gov.
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| 20.
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Does the IRS consider the monthly advances from the reverse mortgage income?
No. The cash advances are loan distributions and are not considered income. In reality, a reverse mortgage is a way to pull cash out of your home based on YOUR equity. The cash advances are tax-free (Consult your tax advisor for more details).
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I am pretty sure I want to get a reverse mortgage, but I have more questions. What is the next step?
The next step would be to call a Reverse Mortgage Advisor at MLS Mortgage. We will be more than happy to answer any further questions that you may have. We understand that your home is more than likely your single largest investment and we will help you make an educated decision that will best meet your needs.
Please call us toll free at 1.888.888.4834 or if you're in Auburn call us at 530.888.6000. We visit you in your home to educate you, but if you would like to stop by our office, we are located at 13478 Luther Road, Suite C, Auburn, CA 95603.
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