The Reverse Mortgage

Before taking out a reverse mortgage, it is important to understand the “ins and outs” of this type of loan.

What is a Reverse Mortgage?

A reverse mortgage allows homeowners over the age of 62 to receive payments against the equity in their home now instead of waiting until the home is sold. “Houses” include two to four unit properties, condominiums, single family dwellings, and townhouses. Manufactured homes will qualify if they were made after June, 1976. Co-ops are eligible on a limited basis in New York City only.

Types of Reverse Mortgages

There are three types of reverse mortgage loans available to you if you live in the United States: the Home Equity Conversion Mortgage (HECM), the Fannie Mae Home Keeper & Homer Keeper for Home Purchase, and the Financial Freedom Cash Account.

HECM will loan you money based on the appraised value of your home up to the FHA lending limit. So, even if your home is appraised at a higher value than what the FHA will lend, you will only receive a loan up to the FHA lending limit. This is the oldest of all of the reverse mortgage programs, available since 1989.

The lenders through Fannie Mae and Fannie Mae’s Home Keeper reverse mortgage can offer you a larger loan than that available through HECM if your property is appraised at a higher level than HECM will cover. Fannie Mae’s program might also cover properties held in trust and leasehold properties.

Financial Freedom Cash Account is available to homeowners who own houses appraised at values that HECM and Fannie Mae do not cover. Cash Account is designed to work for unusual properties or situations and is designed to be flexible to cover individual needs. Owners of co-ops in New York City may qualify for Financial Freedom Cash Account Assistance.

Reverse Mortgage Proceeds

How much money will you get after taking out a reverse mortgage? The amount of money that you will receive depends on the program that you choose, the appraised value of your home, and your age and the age of your spouse, if you have one. The loan is based on the age of the younger of two spouses. Other factors that will influence the amount of money that you will receive include interest rates and any mortgage that you may be carrying against your home.

Reverse Mortgage Payout Plans

You have several choices when you take out a reverse mortgage against your home. You might choose fixed monthly payments that will continue as long as you live in your home or one lump payment at the beginning of the loan. Some people choose to take out a line of credit from which they can draw when they need the money. You can also combine options to customize your cash flow to your needs.

How Can I Use My Reverse Mortgage?

The funds received from a reverse mortgage are not limited in any way. You can use them to pay bills or go on a cruise.

When is a Reverse Mortgage Loan Due?

A reverse becomes due when you sell your home, when both spouses have passed away, or if you move away from your home permanently, even if you do not sell the home.

Why Should I not Consider a Reverse Mortgage?

A reverse mortgage can be very helpful to many. However, it is not a panacea. For example, there are many up front costs that you will incur when you take out a reverse mortgage. These costs can include an origination fee to cover the lender’s expenses, mortgage insurance premiums, appraisal fees, and other closing costs such as escrow closing fees, pest inspection, survey fee, and recording fees. In addition, the loan holder is entitled to take $30-$35 per month out of your loan proceeds.

What does this mean? It might not be a good idea to take out a reverse mortgage if you are planning on selling anyway within a couple of years.

Is Reverse Mortgage for You?

Taking out a reverse mortgage is an important financial decision and should not be taken lightly. You might want to talk to a financial expert to make sure that taking out a reverse mortgage is in your best interests.

~Laura Evans-Staff Editor