Are you a senior citizen homeowner or know one personally? Do you consider yourself “house rich” but “cash poor”?
There’s been a lot of talk on television, radio, and print about the power of reverse mortgages. Some people say it’s the cure to your financial troubles. Other’s say that reverse mortgages make your financial problems even worse. So who’s right? Is a reverse mortgage really the answer for seniors?
You may remember my previous post on the topic of reverse mortgages titled Reverse Mortgages: How Much Money Can I Receive. I covered a question posed by one of my readers and I talked about the 3 parts of the reverse mortgage formula, what happens if you outlive the reverse mortgage, and some helpful tips – I suggest you read that post to get some background on reverse mortgages.
Is a Reverse Mortgage the Correct Option for You?
To keep it simple, reverse mortgages may be a helpful option if you’re at least 62 years old, you need tax-free income without any monthly payments, and you plan to stay in your home for at least 5 years.
The reverse mortgage is a mirror image opposite of an amortized mortgage which would require you to make monthly payments over 15-30 years. The reverse mortgage actually pays money whenever it’s needed by you – plus, you don’t have any repayment obligations unless you sell the house or condo, you move out for more than 12 months or you pass away.
Now, if one of those 3 events happen (selling, moving out, death), the reverse-mortgage principal and accrued interest matures and must be paid in full. If you pass away, then your heirs have one of 3 options:
- They can pay off the reverse mortgage and keep the equity that remains
- They can get a new mortgage loan to pay off the reverse mortgage
- They can sell the home
Mythbusters: Reverse Mortgage Ownership
I’m going to mythbust a common thought about reverse mortgages right here. Many people think that the reverse mortgage lender owns the home. This is not true! Your lender, if you do a reverse mortgage, can never force you to sell or move out of your home. Reverse mortgages are non-recourse. A non-recourse debt is a secured loan that has been secured by a pledge of collateral, typically your home, but for which you are not personally liable. So if you default on this loan, the lender/issuer can seize your home (the collateral), but the lender’s recovery is limited to only your home. Let’s say your property is insufficient to cover the outstanding loan balance. Well, that’s tough luck on the lender as you are not personally liable.
Reverse Mortgage Eligibility and Age Advantages
You’re eligible for a reverse mortgage if you, as the homeowner, are at least 62 years old. If you’re going to have a co-owner, then that person must also be 62, otherwise your residence will not be eligible unless that under-62 person signs a quitclaim deed conveying their interest to you. Reverse mortgage eligibility is always based on the age of the youngest co-owner.
If you’re of a mature age, then your advanced age may be a advantage for you as a borrower. Your life expectancy will determine the amount you can receive. An 85-year-old homeowner will almost always receive a larger reverse-mortgage payment than a 62-year-old would.
Reverse Mortgage Choices: Monthly Payment, Lump-Sum Payment, and Credit Line
If you decide to go with a reverse mortgage, you have 3 ways to receive your money:
- Credit line for future borrowing (not available in Texas)
- Lump sum payment
- Lifetime monthly income (also known as tenure)
You can select a combination of any of these three options. For example, one-half lump-sum payment, one-fourth credit line, and one-fourth monthly payments. You also have the freedom to change your choice just by calling up the loan servicer.
Reverse Mortgage Details
Keep in mind that a reverse mortgage, due to its nature, has a growing balance. This is due to the accrued interest and principal advances. Thus, it is recorded legally as a first mortgage.
If your home already has a first mortgage on record, then you can pay that off with a reverse mortgage lump sum payment. However, if your existing first mortgage plus any liens on the home such as a home equity loan or IRS tax lien exceed 40% of your property’s market value, then your property will not likely be eligible for a reverse mortgage.
The cash you’ll receive from a reverse mortgage depends on several factors and eligibility criteria:
- Age of the youngest homeowner (minimum 62 years old)
- Adjustable interest rate when the reverse mortgage is originated (reverse mortgages always use adjustable interest rates)
- Lender’s appraised market value of the home
- Lender’s maximum mortgage limit
Reverse mortgages are not available for you if you are currently in bankruptcy proceedings and your property must meet minimum standards.
Reverse Mortgage Lenders: How Much You Can Get With Each
FHA has the lead in this with over 90% of the reverse mortgage market controlled by them. But if you go with FHA know that their lending limits are very low! If you live in an expensive high-end community you will likely be very disappointed with what they’ll give you. FHA does have higher lending limits available through the Fannie Mae “Home Keeper” reverse mortgage program – up to $417,000. Fannie Mae (FHA) also has a “reverse mortgage for home purchase” program where you can buy a home as a senior citizen and you won’t have to make any monthly payments.
The Financial Freedom Plan (FFP) might be the best choice for you if you need higher lending limits. Their “jumbo cash account” reverse mortgage has no maximum limit.
Whichever way you decide to go with reverse mortgages, talk it over with your co-homeowners, your possible heirs, and a respected legal professional so you know your options.
