Reverse Mortgage FAQ
Is it expensive?
Not necessarily. The majority of closing costs and fees can be financed into the reverse mortgage loan. Compared to selling a home and moving, a reverse mortgage loan can provide relatively cost efficient access to your home equity.
When does it have to be paid back?
The loan becomes due when all of the homeowners have passed away or permanently moved out of the property provided that taxes and insurance are paid and home is maintained to Federal Housing Administration (FHA) standards.
Why are there no monthly payments?
There are no monthly mortgage payments because the lender expects that when the loan becomes due, the value of the home will be high enough to cover the amount borrowed plus interest.
Are there limits on how I can use the money?
No. The funds can be used without restriction.
Does a reverse mortgage sell the home to the bank?
Banks and other lenders seek to make loans and earn interest not to own property; Consequently, the bank or lender does not purchase the home. Instead, the bank or lender adds a lien in the form of a reverse mortgage loan onto the title so they can eventually collect the amount loaned plus interest.
Will the estate inherit the home?
The estate does inherit the home but there will be a lien on the title. If your heirs wish to retain the property, then the full amount of the loan must be paid regardless of property value..The amount due at loan maturity is the principal borrowed, accrued interest, service fees and any servicing advances..
For example, if someone with a $250,000 home passes away and leaves a reverse mortgage loan balance of $80,000, then the estate would sell the home for $250,000, repay $80,000 to the bank, and keep the $170,000 difference.
As a “non-recourse” loan, the only asset guaranteeing the reverse mortgage loan is the property and not the whole estate. If the home sells for less than the reverse mortgage loan balance, the assets of the estate are not responsible for making up the difference.
Can the homeowner get forced out of the home?
The FHA reverse mortgage loan exists to help the homeowner to stay in their home. Since a reverse mortgage loan requires no monthly mortgage payments, however; the homeowner must reside in the home as their primary residence, pay their property and homeowners insurance and maintain the home. In the event the borrowers do not adhere to these responsibilities, HUD guidelines may require the servicer to initiate foreclosure proceedings.
Will Social Security or Medicare be affected?
Entitlement programs like Social Security and Medicare are not affected. However, need-based programs like Medicaid can be affected based on the specific program requirements. You should consult with a qualified financial advisor to learn how a reverse mortgage loan could impact eligibility of some government benefits.
Are taxes owed on a reverse mortgage?
Loan proceeds are not considered income and are not taxable. Consult a tax advisor for more information.
Is it similar to a home equity loan?
A home equity loan and a reverse mortgage loan both use the home’s equity as collateral.
- Any homeowner can apply for a home equity loan. A homeowner must be at least 62 years old to apply for a reverse mortgage loan.
- A home equity loan must be repaid over 5 or 10 years. A reverse mortgage loan is generally not repaid until the homeowner passes away or permanently moves out for 12 consecutive months.
- A home equity loan may have few closing cost fees and a higher interest rate over the life of the loan. A reverse mortgage loan charges upfront closing costs that typically can be financed in the loan and generally has lower interest over the course of the loan.
I live with my parents who have a reverse mortgage loan. What should I do when they pass away?
It is important that you contact the servicer of the loan to notify them that the borrower(s) have passed away. The servicer’s contact information can be found on the monthly statement. Let the servicer know the situation and they will guide you on the next steps and what you (the heirs) will need to do next.