I'm often asked, "What is a 'reverse mortgage,' and how does it work?" Those are both great questions, especially if you've never heard of the term before. A reverse mortgage is similar to a traditional mortgage in that, a lien is placed against the house. The big difference, however is that instead of making payments on the loan, the loan pays you. No monthly mortgage payments are required from the borrower.
There are 4 basic options for payments in a reverse mortgage. First, you can take a lump sum. You can take the full amount available to you at the closing. Second, you can take a term payment - this pays you $xxx for a period of time (10 years, 15 years, etc.) Third, you can take a tenure payment, this is a monthly payment for as long as you (or your spouse) live in the home. Finally, you can take a line of credit. This gives you the flexibility to use the funds as the need arises. Further, the unused portion of the line can increase each year - increasing the a vailable amount of funds.
In addition to the 4 options, listed above, there is the flexibility of combining them. For example, you could take a disbursement up front and then set up a line of credit, or you could take a disbursement up front and then set up a tenure payment (monthly payments for as long as you live in the home). The flexibility to choose what you want is one of the attractive parts of the reverse mortgage product.
So, now that you've reversed your mortgage, what happens next? Well as long as you live in the property, continue to pay your taxes and homeowners insurance and continue the reasonable upkeep on the home - the general answer is not much. Interest will accrue on the loan balance - which will make the balance increase. Monthly mortgage insurance is added on to the balance, as well as a monthly servicing fee - but as far as repayment is concerned, the loan does not need to be repaid until the borrower no longer occupies the property, the b orrower sells the home or the borrower passes away. The purpose of th e mortgage insurance is to insure that the borrower (or their estate) does not have to pay more than the home is worth upon the sale of the home.
Reverse mortgage eligibility is determined by two basic things. First, you must own your home - or have a substantial amount of equity. Second is the age of the youngest borrower. For federally insured reverses, the minimum age is 62. How much loan you can get depends on several factors including, the age of the youngest borrower, the value of the home, current interest rates, the type of loan chosen and in some instances geographical location.
Most of the reverse mortgage loans originated today are insured through the Federal Housing Administration (or FHA). The FHA sets the maximum loan limits by county. So, depending on what county you live in, your loan limit will be based on the maximum limit imposed by the FHA.
As an example, as of 10/21, a 69 year old female borrower living in Monmouth County, NJ, owning a $ 375,000 property with no mortgage balance would be eligible for a maximum principal limit of approximately $242,000 based on the current FHA maximum limit of $362,790 in Monmouth County. After costs and fees, the borrower would be eligible for a tenure payment of approximately $1300 per month for the rest of her life. If that borrower were to take a $50,000 lump sum up front, the monthly tenure payment would drop to approximately $1,000.
Again, all of this is accomplished with NO monthly mortgage payment ever from the borrower. The borrower retains ownership of the home until they sell, or pass away. If they keep the home until they die, the estate/their heirs, have the option to pay off the balance or sell the home. It is a good option for borrowers who wish to spend their golden years in their homes. It's not a good option if they plan to move. But for many seniors today, a reverse mortgage can make the difference between scrimping to live day to day and living comfo rtably.
Henry Salomon is a 13 year mortgage industry veteran. He has worked in varying capacities throughout his career including: loan officer, branch manager, underwriter, secondary marketing, credit risk management and more. He counts large banks and Wall Street firms among his former employers. He has been a speaker at broker conferences and a panelist at mortgage round table discussions. He is currently the Vice President of Retiring in Comfort. At Retiring in Comfort, he does workshops throughout the state to present reverse mortgages as well as various topics of interest to seniors. To schedule a workshop, he can be contacted at henry.salomon@yahoo.com.
A reverse mortgage is a means of borrowing money from the amount you have already paid for your house.
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