The term reverse mortgage is used most often for the Home Equity Conversion Mortgage (HECM), which is the Federal Housing Administration (FHA) reverse mortgage. There are proprietary reverse mortgages available, but they are quite rare these days. As the HECM is a federally insured reverse mortgage, it is a non-recourse program.
So, what is the difference between a reverse mortgage and a home equity line of credit (HELOC)? A reverse mortgage is a loan that uses a home as collateral and does not require a monthly principal or interest payment. As long as the reverse mortgage loan is outstanding, you own your home.
A HELOC releases equity in the home in the form of cash for you to spend as you choose. You must repay this money on a monthly basis just as you would for a conventional mortgage. A reverse mortgage does not have be repaid until you sell the home, no longer occupy it as a primary residence, fail to pay the property taxes and homeowner’s insurance, or pass away.
How Can I Use My Reverse Mortgage?
The original intention for the reverse mortgage was to assist senior citizens who were strapped for cash and did not want to lose their homes. While there is nothing wrong with using the funds for this purpose, they can be used for virtually anything, including the following:
- Daily living expenses
- Eliminating an existing mortgage
- Medical bills, long-term health care, and prescription medications
- Home repairs and modifications
- Existing debt (i.e. credit card, student loans, car payments)
- Traveling and other luxury expenses
If your home is in need of mandatory physical repairs (i.e. plumbing or electrical work, new roof) in order to qualify for a reverse mortgage, you might be able to set aside part of the funds for this purpose.
How Does the Reverse Mortgage Payment System Work?
Just as there are fixed rate and adjustable rates for traditional mortgages, there are also fixed and adjustable rates for reverse mortgages. For a fixed rate reverse mortgage, you have to take a lump sum at closing. An adjustable rate reverse mortgage enables you to take a lump sum, line of credit, monthly payments, or a combination of the preceding options. For example, if you have enough loan proceeds, you could take $15,000 at closing, $30,000 on a line of credit, and $1,000 per month for a given number of months. Many borrowers opt for a line of credit because it allows them to access the money when they need it.
Remember that until the funds are received, the interest does not accrue. If you opt to take an adjustable rate reverse mortgage with monthly payments or a line of credit, you can significantly reduce the amount of interest that will accrue over a long period of time.
For a detailed walk-through of the process, please download one of the in-depth guides we’ve put together.
Which Factors Determine the Size of the Reverse Mortgage?
There are number of components that are used to figure out the size of the loan including the following:
- Your age at the time of the application
- The type of reverse mortgage
- The value of your home
- Current interest rate
Typically the older you are, the more valuable the home, and the less money you owe, the larger the proceeds that you can receive.
Once upon a time, it was quite simple to list the closing costs associated with reverse mortgages. You were unlikely to see varying fees when you shopped around with different lenders. As there is a healthy secondary market for reverse mortgages these days, that isn’t true anymore. Take the time to get a complimentary estimate from a reverse mortgage adviser that is tailored to the value of your home and the youngest homeowner’s birth date. He or she will be able to recommend a product that best fits your needs.
Keep in mind that adjustable and fixed rate reverse mortgages have different amounts of fees. Typically closing costs include the following:
- Lender. Origination fee, appraisal, document preparation, credit report, flood certification. The client often pays out of pocket for the appraisal.
- FHA. The FHA upfront mortgage insurance premium.
- Title. Closing fee, lender’s title insurance, title search, title binder, endorsements.
- County. Recording fees, taxes, state per loan fee.
Reverse mortgage funds are tax-free and do not have any effect on standard Medicare or Social Security benefits. They can affect eligibility for specific types of government assistance, including state assistance programs and Medicaid. If you have any questions or concerns about how a reverse mortgage affects your government benefits, it is best practice to check with an elder law attorney.