Frequently Asked Questions
Here are some of the most frequently asked questions about reverse mortgages. Simply click on the question and it will link your to the appropriate answer. You can also scroll down the entire list of questions and answers.
Q. What is a reverse mortgage?
A. A reverse mortgage allows homeowners age 62 or older to convert a portion of the equity they have built up over time into tax-free cash–without having to sell their home, give up title to it, or make monthly payments. They can receive these funds either in the form of a lump sum, monthly payment, or line of credit. Unlike a traditional home loan, a reverse mortgage has no monthly payments -- no repayment is required until the home is sold or when it is no longer used as a principal residence by anyone on the loan. When the home is sold, the lender recovers its principal plus interest. The remaining equity in the house goes to the homeowners or their heirs (the heirs to the estate have the right to pay off the loan and assume ownership of the house). The United States Department of Housing and Urban Development (HUD) regulates most reverse mortgages, and they are FHA insured as well.
Q: When did the Home Equity Conversion Mortgage or Reverse Mortgage start?
A. The Home Equity Conversion Mortgage was authorized by Congress in the Housing and Community Development Act of 1987 and was initially limited to 2,500 loans. HUD insured the first HECM loan in November 1989. In 1998 the HUD Appropriations Act made the HECM a permanent program.
Q: Why did Congress pass the HECM Act?
A. Congress saw a need with citizens 62 years of age or older. The concept behind the HECM is to allow people to age in their homes. Congress determined that most people, as they age, desire to do so in their current homes. However, because of reduced income this is not always possible. The HECM addresses this situation.
Q: Approximately how many people have used reverse mortgages?
A. While it is difficult to determine accurately, we estimate that by the end of 2009 more than 500,000 HECM mortgages have been originated since 1987. As more people understand the product, the number of homeowners using it has increased dramatically.
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Q. How is a reverse mortgage like a home equity loan? How is it different?
A. Both a reverse mortgage and a home equity loan use the equity you have built up in your home to provide you with readily available cash. They differ in that with a home equity loan, you must qualify based on your income, assets and credit history and you must make regular monthly payments of principal and interest. In contrast, With a reverse mortgage, you do not have to make any monthly payments for as long as you maintain the home as your primary residence. Also, there are no income, asset or credit requirements. In addition, you must go through mandatory counseling prior to signing an application.
Q: How do I qualify?
A. Qualifying for a reverse mortgage is easy. You qualify based on the value of the home (less any liens, mortgages, or judgments), the age of the youngest homeowner and the current interest rate. Your income, assets and credit history are not considered when qualifying for a reverse mortgage, enabling almost any homeowner age 62 and over to qualify.
Q: What types of properties are eligible?
A. An eligible property must be your principal residence, and can be a single-family residence; a one- to four-unit dwelling with one unit occupied by you, the borrower; certain types of manufactured homes or mobile homes, FHA approved condominiums, and planned unit developments. Cooperatives are generally not eligible for a reverse mortgage. Your property must meet FHA minimum property standards.
Q: Can I apply if we didn’t buy our present house with FHA mortgage insurance?
A. Yes. While your property must meet FHA minimum standards, it doesn’t matter if you didn’t buy it with an FHA-insured mortgage. Your HUD reverse mortgage will be a new FHA-insured mortgage loan.
Q. How much money can I receive?
A. The total amount of reverse mortgage funds available depends on several factors including the age of the youngest homeowner, the type of reverse mortgage selected, current interest rates, the appraised value of your home and FHA lending limits for your area. In most cases, the older you are, the more valuable your home, and the fewer real estate secured liens
(i.e., existing mortgages or home equity loans), all increase the amount of reverse mortgage money you can obtain.
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Q. How can I receive payments?
A. Reverse mortgage payments are tax-free and can be received in a variety of ways, enabling a reverse mortgage payout plan to be tailored to fit your needs: *
- As an immediate cash advance at closing, that is, a lump sum of cash paid to you on the first day of the loan.
- As a credit line account that lets you take cash advances whenever you choose during the life of the loan - until you use it all up.
- 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 as any combination of immediate cash advance, credit line account, and monthly cash advance.
Use our Calculator to estimate how much cash you could receive from a reverse mortgage.
* To receive payments the homeowner must continue to occupy the home as his/her primary residence, keep it in good repair, with all taxes and insurance premiums kept up to date, subject to the terms of the mortgage.
Q: What should I consider when selecting a payout plan?
A. If you take a credit line account, the total amount of cash you actually receive will depend on two things: how much of your available credit line you use, and whether the credit line is "flat" or "growing." With a flat credit line, 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 credit line and take out $10,000, you would have $40,000 left whenever you decided to take out more. But with a growing credit line, your remaining available credit grows larger by a given rate. For example, if you took $10,000 from a $50,000 credit line 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 year would become $50,388 after three years. So a growing credit line 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 credit line 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.
If you take monthly loan advances, the total amount of cash you actually receive 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.
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Q. What costs and fees are associated with a reverse mortgage?
A. As closing costs can be paid directly out of the reverse mortgage proceeds, there are no “up-front” funds needed to obtain a reverse mortgage. Like any mortgage loan, you will have to pay interest on the principal advanced. You will also be charged a monthly servicing fee for the lender to make cash advances to you, make requested changes in your payout plan, and to maintain your reverse mortgage account, etc. A reverse mortgage is different from a Forward Mortgage, however, in that you make no monthly payments. The loan is due at the time you cease to live in the house as your primary residence or sell the house.
Q. How much cash will I have to come up with for closing costs?
A. As is the case with any forward mortgage, a reverse mortgage does have closing costs. However there are no “up-front” funds needed to obtain a reverse mortgage because the closing costs are paid directly out of the reverse mortgage proceeds. Closing costs can vary, depending on the value of your home and the county in which it is located . Typically the total closing costs are the same as required with a forward mortgage.
Q. Why should I ask the lender to explain TALC rates?
A. Federal Truth-in-Lending law requires reverse mortgage lenders to disclose the projected annual average cost of these loans in a way that includes ALL of the costs and benefits, and also takes into account the nonrecourse limits. This Total Annual Loan Cost (TALC) disclosure shows you what the single all-inclusive interest rate would be if the lender could only charge interest and not charge any other fees. Specifically, it tells you the annual average rate that would produce the total amount owed at various future points if only that rate were charged on all the cash advances you get that are not used to pay loan costs. In other words, it shows you what you are paying in total for the money you get to spend. Reverse mortgages vary in terms of their features, benefits, and costs, so it’s not always easy to compare "apples to apples."If you are considering a reverse mortgage, be sure to ask the lender or counselor to explain the TALC rates for the various reverse mortgage product options.
Q. What are the tax consequences of a reverse mortgage?
A. Because the Internal Revenue Service considers reverse mortgage proceeds to be loan advances, and not income, they are not taxable. It’s always important to consult with your tax advisor regarding these matters.
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Q. If I take on a reverse mortgage, how will it affect my government benefits?
A. Having a reverse mortgage should not affect your Social Security or Medicare benefits.* However, if you receive SSI, Medicaid, or other public assistance, your reverse mortgage loan advances are counted as "liquid assets" if you keep them in an account past the end of the calendar month in which you receive them. You must be careful not to let your total liquid assets become greater than these programs allow. You should discuss the impact of a reverse mortgage on federal, state, or local assistance programs with your financial advisor and/or Social Security or Medicare agencies.
Q. Can my current income influence my ability to get a reverse mortgage?
A. No. Since reverse mortgage borrowers need not make monthly payments, there are no income requirements.
Q. Can my credit history influence my ability to get a reverse mortgage?
A. No. Since reverse mortgage borrowers need not make monthly payments, there are no credit requirements.
Q. Will I continue to own my home?
A. Yes. You -- not the lender -- retain the title to your home, so your home isn’t at risk unless you fail to meet the terms of the loan. You retain ownership of your home, and the government guarantees that you can't be forced to sell or move. HUD reverse mortgages are insured by the government, so even if real estate is down and your house eventually sells for less than the amount of the reverse mortgage, the government will pay the difference.
Q. When must a reverse mortgage loan be repaid?
A. The lender must be repaid when the last borrower passes away, sells the home, fails to live in the house for twelve consecutive months (including time spent in a nursing home), fails to pay property taxes or insurance, or lets the property fall into disrepair beyond normal wear and tear. When the loan becomes due, the reverse mortgage principal advanced, interest charges, and service fees are paid in full from the sale of the house or other assets of the estate. Whatever is left over from the sale of the home goes to the owner or estate.
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Q. What kinds of reverse mortgages are available?
A. There are three basic types of reverse mortgages:
- Federally-insured reverse mortgages:
Known as the Home Equity Conversion Mortgage, the HECM is currently the most prevalent type of reverse mortgage. The HECM is insured by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD). They are widely available, have no income, asset, or credit requirements, and can be used for any purpose. You cannot use this HECM for the purchase of a home.
- HECM for Purchase:
This is a HECM by which the borrower can use to purchase a new primary residence.
- Proprietary reverse mortgages:
These are private loans with unique features that appeal to certain kinds of borrowers.
Q. Are reverse mortgage interest rates fixed or variable?
A. . Reverse mortgages have variable and fixed rate options. Interest rates adjust on a monthly or annual basis.
Q. Can I refinance a reverse mortgage, as I can with a traditional home mortgage?
A. . Yes. Refinancing may make sense if your home increases in value, interest rates drop significantly, or you are much older than at the time of the original loan closing.
Q. If I have an existing first or second mortgage, can I get a reverse mortgage?
A. . Yes, you may be eligible for a reverse mortgage - even if you still owe money on a first or second mortgage. You must use reverse mortgage proceeds to pay off the existing mortgage balances, however.
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Q. Can I get a reverse mortgage on a second home or resort property?
A. Unfortunately, no. A reverse mortgage may only be taken out on your primary residence.
Q. Would a home that is in a "living trust"/ "life estate" be eligible for a reverse mortgage?
A. Typically, yes. In most cases a homeowner who has put his or her home in a living trust/life estate deed can obtain a reverse mortgage. A review of any trust documents would be made by the reverse mortgage lender to determine if anything in the living trust/life estate would prohibit qualification.
Q. Can a reverse mortgage lender take my home away?
A. No. You cannot outlive the loan agreement, and no debt from a reverse mortgage will be passed along to the estate or heirs. You cannot be forced to sell your home to pay off the mortgage loan even if the loan balance grows to exceed the value of the property. Also, HUD’s Federal Housing Administration guarantees that you will receive all the payments that are owed to you.
Q. If I obtain a reverse mortgage, will I still have an estate that I can leave to my heirs?
A. Yes. The title will pass to your heirs. If they wish to keep the house, they will need to repay the balance of the loan with interest.
Q. Must my heirs sell the property to repay the reverse mortgage loan?
A. No. They can pay off the existing reverse mortgage balance with other available funds or obtain a forward mortgage to pay off the balance and not sell the home.
Q. Why must I speak with a counselor before completing my reverse mortgage application?
A. This is a federally mandated feature of the reverse mortgage process and is designed for your protection. The counselor, who is from an independent government-approved housing counseling agency, explains in detail the pros and cons of your reverse mortgage alternatives. He or she will discuss reverse mortgage costs and financial implications as well as tell you about any government or nonprofit programs for which you may qualify.
Q: Should we use an estate planning service to find a reverse mortgage? We have been contacted by a firm that will refer us to a lender in exchange for a “small percentage” of the loan.
A. : There really is no reason for you to engage such a service. HUD provides this information without cost, and HUD-approved agencies are available for free—or at minimal cost—to provide counseling and referral to HUD-approved lenders. More information is available at your local HUD-approved housing counseling agency.
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