REFINANCING AND HOME EQUITY

All About Reverse Mortgages

A reverse mortgage allows you to convert the equity in your home into a lump-sum payment, monthly income, or a line of credit.

Why would you want to do that? Well, it can be a useful strategy in retirement (you must be at least 62 years of age to qualify for such a mortgage) if you want some extra income. It's called "reverse" because it reverses the direction of the payments: instead of building up equity in your house by putting the money in, you actually reduce equity in the house by taking money out.

No payments are made on the loan until you no longer occupy the home as your primary residence. When you move or sell your home, the loan balance is due and payable. However, the loan balance is never allowed to exceed the value of your home.

What are the eligibility requirements for a reverse mortgage?

  • You and all co-borrowers must be a minimum of 62 years old.
  • The home should have a very low mortgage balance or be owned free and clear.
  • The home must be owner-occupied. FHA-approved condominiums and two- to four-unit dwellings (owner occupied) are also eligible.

How is my equity determined?

The allowable equity is calculated based on three factors:
  1. The youngest borrower's age
  2. The appraised value of your home
  3. The FHA maximum loan limit for your county

What fees are involved?

Like most loans, you will pay an origination fee, appraisal fee, title fee, escrow fee, recording fee, and a monthly servicing fee. These fees can be included in your loan balance, if there is enough equity available.

What happens when the loan balance exceeds the value of my home?

You must occupy the property, and are responsible for maintenance and payment of taxes and insurance. As long as you abide by the loan agreement, you cannot be forced to sell or vacate your home. No deficiency judgment may result from your reverse mortgage. FHA insurance guarantees against any loss to the lender.

What if my home is in need of repairs?

With the reverse mortgage, repairs can be paid for out of the available equity. Some of the repairs can even be done after your loan has closed and funded.

How will this affect my heirs?

Upon your death, the loan balance becomes due and payable. Your heirs may repay the loan by selling your home, or refinance the reverse mortgage and keep the home. If your home has appreciated in value, you are required to pay back only the outstanding balance. Any money that remains after the mortgage is paid would go to your heirs.

Will this affect my Social Security income?

Reverse mortgage loan funds do not affect your Social Security or Medicare benefits. However, Social Security income benefits are limited, and you must structure your cash payments to follow those guidelines. Additionally, Medicaid, Aid to Families with Dependent Children (AFDC), and food stamps all have different eligibility requirements. We recommend that you contact your local agency on aging, or these agencies' respective offices, for their particular guidelines.