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The Facts About a Reverse Mortgage

1. What is a reverse mortgage?

A reverse mortgage allows homeowners who are 62 years of age and older to utilize their equity as income.  By the way, equity is the difference between how much you owe on your home and the appraised value of the home.  For instance, you may owe $80,000, and the home appraises for $100,000.  The difference is $20,000.  $20,000 is the equity in the home.

The reverse mortgage is called “reverse” because instead of the borrrower paying the lender a monthly payment; the borrower is paid a monthly payment from the lender based on specific criteria.

2. How much money do you get?

The amount that you will receive depends on several factors such as,

• your age and/or the age of the youngest spouse
• the value of the home
• interest rate charged
• the governmental program that you qualify for

3.  does your home qualify?

As long as your home is a single family home, condomium, townhome, 2-4 unit building, or manufactured home (built after June 1976), your home qualifies for a reverse mortgage.

4. What are your payment options?

If you elect to utilize a reverse mortgage, you can receive a one time lump sum or installments.

5.  What features does the reverse mortgage have?

The reverse mortgage has a growth feature.  The growth feature does not, however, go to you as the borrower as in accrued interest in a savings account.  “The growth factor, which is equal to roughly the interest you’re being charged, takes into consideration that your home has appreciated in value over the past twelve months and that you are one year old”.

6.  How can you use the proceeds of the reverse mortgage?

Once you receive the proceeds, you can use it for whatever you like.

7. How does the interest work on a reverse mortgage?

Interest is charged only on the amount that you receive.  Remember, if you elect to receive the money as a line of credit, the interest is only charged on the amount of credit used.

8.  What if you owe a mortgage?

You may still qualify for the reverse mortgage; however,  the reverse mortgage must be the only mortgage on your home.  In other words, if your home appraises high enough the existing mortage will be paid off and the remaining equity will be yours.

For example, if you owe $125,000 on your existing mortgage and based on the factors discuss earlier ie age, home value, and interest rate you qualify for $175,000.  Then, you have $50,000 available to use as you like.

9.  What is the service set aside fee?

The reverse mortgage is regulated by FHA’s HECM program.  FHA charges $30 to $35 a  month to service your loan.

10.  Will you lose governmental assistance if you get a reverse mortgage?

The reverse mortgage will not affect your social security or medicare benefits.  However, it will affect Medicaid.  Medicaid consider the proceeds from the reverse mortgage as an asset, and it may affect your eligibility.

11. When do you pay the loan back?

There is no money due as long as you reside in the home.  If you decide to sell the home, pass away, or move out permanently, you will be obligated to pay the money back. 

12.  Under what circumstances should you not consider a reverse mortgage?

The upfront fees for this mortgage is high so you may not want to do the loan because of this.  Another reason is that if you are considering moving in the next couple of years it will not be worth it.  If you are consider leaving your home to your children then the reverse mortgage may not be for you because the home is usually sold to pay the reverse mortgage back to the lender.

If you would like more information on the reverse mortgage contact AARP at 800-209-8085 or National Foundation for Credit Counseling at 866-698-6322.

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