What's a reverse mortgage?

A loan against your home that requires no repayment for as long as you live there.  

 How's it different?

• To qualify for most loans, the lender checks your income to see how much you can afford to pay back each month. But with a reverse mortgage, you don't have to make monthly repayments. So your income generally has nothing to do with getting the loan or the amount of the loan.

• With most home loans, if you fail to make your monthly repayments, you could lose your home. But with a reverse mortgage, you don't have any monthly repayments to make. So you can't lose your home by failing to make them.

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Who can get one?

• You must own your home, and generally all of the owners must be at least 62 years old.

• Your home generally must be your "principal residence" - which means you must live in it more than half the year.

• For the federally-insured "Home Equity Conversion Mortgage" (HECM), your home must be a single-family property, a 2-4 unit building, or a federally-approved condominium or planned unit development (PUD). For Fannie Mae's "HomeKeeper" mortgage, it must be a single family home or condominium.

• Reverse mortgage programs generally do not lend on cooperative apartments or mobile homes, although some "manufactured" homes may qualify if they are built on a permanent foundation, classed and taxed as real estate, and meet other requirements.

• If you have any debt against your home, you must either pay it off before getting a reverse mortgage or - this is what most borrowers do - use an immediate cash advance from the reverse mortgage to pay it off. If you don't pay off the debt beforehand, or do not qualify for a large enough immediate cash advance to do so, you cannot get a reverse mortgage.

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How much cash can you get?

The amount of cash you can get from a reverse mortgage depends on the program you select and - within each program - on your age, home, and interest rates.

• It can vary by a lot from one program to another. A typical consumer might get $30,000 more from one program than from another. But no single program works best for everyone.

• For all but the most expensive homes, the federally-insured "Home Equity Conversion Mortgage" (HECM) or Fannie Mae's "Home Keeper" mortgage generally provide the most cash. They are also the most widely available reverse mortgage programs.

• Within each program, the amount of cash you can get depends on the age(s) of the owner(s), the value (and in some cases the location) of the home, and current interest rates. In general, the most cash goes to the oldest borrowers living in the homes of greatest value at a time when interest rates are low. On the other hand, the least cash generally goes to the youngest borrowers living in the homes of lowest value at a time when interest rates are high.

But remember, the total amount of cash you actually end up getting from a reverse mortgage will depend on how it's paid to you plus other factors.   

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How's it paid to you?

That's up to you. You could take it

• as an immediate cash advance at closing, that is, a lump sum of cash paid to you on the first day of the loan

• a creditline account that lets you take cash advances whenever you choose during the life of the loan - until you use it all up

• OR as a monthly cash advance
  
  • for a specific number of years that you select, 
    
  • OR for as long as you live in your home,
  • OR - if you use the loan to buy an annuity - for the rest of your life, no matter where you live
    
• OR as any combination of immediate cash advance, creditline account,  and monthly cash  advance

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How much total cash?

• If you take a creditline account, the total amount of cash you actually get will depend on two things: how much of your available creditline you use, and whether the creditline is "flat" or "growing."

• With a flat creditline, the amount of remaining available credit at any time only changes if you take a cash advance, at which point it decreases by the amount of the advance. For example, if you have a flat $50,000 creditline and take out $10,000, you would have $40,000 left whenever you decided to take more.

• But with a growing creditline, your remaining available credit grows larger by a given rate. For example, if you took $10,000 from a $50,000 creditline that grows by 8% each year, and then came back for more three years later, there would then be over $50,000 left to use - because the remaining $40,000 growing at 8% per your would become $50,388 after three years.

• So a growing creditline can give you a lot more cash over time than a flat one. That’s why you need to look at more than the size of a credit-line when a reverse mortgage starts. You also should consider how much available credit would be left in the future. This will also depend, of course, on how much you take out and when you take it.

• The creditline in the Home Equity Conversion Mortgage (HECM) program grows larger each month by the same rate as the one being charged on the loan balance. It keeps growing for as long as there is any credit left, that is, until you withdraw all your remaining credit.

• Fannie Mae's HomeKeeper creditline is flat. The remaining available credit does not increase. 

• If you take monthly loan advances, the total amount of cash you actually get will depend on whether you select a plan that sends them to you for a specific number of years, or for as long as you live in your home. It will also depend how long you actually live in your home.

• If you use a reverse mortgage to buy an annuity, the total amount of cash you actually get will depend on how long you live - no matter where you live. The net value of that cash to you, however, may depend on other factors.

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What happens to your debt?

It grows larger and larger as you keep getting cash advances, make no repayment, and interest is added to the amount you owe (your "loan balance").

That's why reverse mortgage are called "rising debt, falling equity" loans. As the amount you owe (your debt) grows larger, your equity (that is, your home's value minus any debt against it) generally gets smaller.  

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That why it's called "reverse"?

• Yes. In a "forward" mortgage (the kind you normally use to buy a home), your regular monthly repayments make your debt go down over time until you have it all paid off. Meanwhile, your equity is rising as you owe less and less, and as your property value grows (appreciates). So forward mortgages are "falling debt, rising equity" loans - just the opposite of reverse mortgages.

• Here's another way to think of it. In a forward mortgage, you use debt to turn your income into equity. In a reverse mortgage, you use debt to turn your equity into income. You are reversing the deal you used to buy your home. Then, you had income and wanted equity. Now, you have equity and want income. In both cases you use debt to turn what you have into what you want.

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When do you pay it back?

• When the last surviving borrower dies, sells the home, or permanently moves away. "Permanently" generally means you have not lived in your home for 12 months in a row.

• You might also have to pay it back if you fail to pay your property taxes, fail to keep up your homeowner's insurance, or let your home go to waste. But if you do, the lender may be able to make extra cash advances to cover these expenses.
  

Just remember, reverse mortgage borrowers are still homeowners and therefore are still responsible for taxes, insurance, and upkeep.    

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What do you owe?

The total amount you will owe at the end of the loan (your "loan balance") equals

• all the cash advances you've received (including any that were used to pay loan fees or costs)

• plus all the interest on them -

• up to the loan's "nonrecourse" limit (see answer to next question).

Interest rates can change based on changes in published indexes. But the more adjustable they are, the lower they start – so they give you larger cash advances. And they will be lower than less adjustable rates all during the time that index rate changes don’t exceed the caps on the less adjustable rates.

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What's the most you can owe?

You can never owe more than the value of the home at the time the loan is repaid. Reverse mortgages are generally "nonrecourse" loans, which means that in seeking repayment the lender does not have recourse to anything other than your home. Not your income, your other assets, or your heirs.

So even if you receive monthly loan advances until you are aged 115, your home declines in value between now and then, and the total of monthly advances becomes greater than your home's value - you can still never owe more than the value of your home. If you or your heirs sell your home in order to pay off the loan, the debt is generally limited by the net proceeds from the sale of your home.

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• If you sell and move, you would most likely pay back the loan from the money you get from selling your home. But you could pay it back from other funds if you had them.

• If the loan ends due to the death of the last surviving borrower, the loan must be repaid before the home's title can be transferred to the borrower's heirs. The heirs could repay the loan by selling the home, using other funds from the borrower's estate or their own funds, or by taking out a new forward mortgage against the home.

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What's left?

Not all reverse mortgage borrowers end up living in their homes for the rest of their lives. Some who expect to remain living there change their minds. Others face later health problems that require a move.

So it makes sense to plan for the possibility that you may sell and move some day. How much equity would be left if you did?

• If, at the end of the loan, your loan balance is less than the value of your home (or your net sale proceeds if you sell), then you or your heirs get to keep the difference. The lender does not "get" the house. The lender gets paid the amount you owe, and you or your heirs keep the rest.

• IMPORTANT: If you take the loan as a creditline account, be sure to withdraw all remaining available credit before the loan ends. You will have the money sooner that way, and it could be more than otherwise might be left. For example, a growing creditline could become greater than the leftover equity in some cases.

• If you have purchased an annuity and then sell your home, you could continue receiving monthly annuity advances for the rest of your life. If the loan ends due to the death of the last surviving borrower, and if the annuity purchased by the borrower includes a death benefit or "period certain" payments, then the annuity's beneficiaries would receive additional cash.

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Reprinted with permission National Center for Home Equity Conversion. Copyright © NCHEC. All rights reserved.