FAQs
What is a Reverse Mortgage?
A reverse mortgage is a special loan for homeowners age 62 and over with no monthly mortgage payments to make until the home is sold or the last borrower moves out. It can be described as a mortgage loan with deferred payments. Not having to make payments (1) can greatly improve cash flow and provide the cash needed for home improvements, medical or retirement expenses, to accomplish financial and estate planning objectives and even to buy a home and (2) means no income test to qualify. The Home Equity Conversion Mortgage or “HECM” is a reverse mortgage that is insured by the Federal Housing Administration (FHA).
Who Qualifies?
Homeowners age 62 and over. There are no income requirements or limitations or health questions.
How Much Money Is Available?
The amount you qualify for is based on the value of your home, your age and current interest rates. The older you are, the greater the amount. Typical amounts for a line of credit or lump sum range from about 50% to 70% of the appraised value of the home, but the amount is determined by an actuarial formula, not by a percent.
What Is the Money Used For?
The Bethlehem borrower in the PBS Report (see our home page) said she was “feeling the pinch” of living on a fixed income. By far and away, most borrowers use a reverse mortgage as an additional source of retirement income. A reverse mortgage can replace a conventional mortgage or home equity loan and eliminate mortgage payments. Whether used purely as new income or to eliminate a mortgage payment, a reverse mortgage will always improve cash flow.
Some take an initial advance to buy a car or to pay some bills. Others take an advance each year to pay real estate taxes and/or home owner insurance.
The National Council on Aging “Use Your Home to Stay at Home” program suggests using reverse mortgage proceeds for home modifications, ramps and other necessary expenses so you can stay in your home longer.
Financial advisors are finding reverse mortgages useful as part of a strategy to accomplish a financial objective such as to save taxes.
Finally, new in 2009 is use of a HECM reverse mortgage for home purchase. Homeowners age 62 and over, including those with limited income, can now use a reverse mortgage to finance the purchase of a new home. For example, a couple living in a $250,000 home with a $100,000 mortgage can sell their home and use the proceeds as a down payment on a new home. A $125,000 down payment matched with a $125,000 reverse mortgage could result in a likely more accessible $250,000 new home and no more mortgage payments.
Are a Lot of People Doing This?
The number of FHA insured HECM Reverse Mortgages has increased dramatically in recent years, from about 14,000 in 2002 to over 112,000 loans made in 2008 and 114,000 in 2009.
Is It Safe?
You cannot lose your home for failure to make mortgage payments, since there are no mortgage payments to make. FHA insurance guarantees that the monthly income is for life. You must continue to pay real estate taxes and homeowner insurance. Consumer protections include counseling by an FHA approved counseling agency before the lender can proceed. FHA also limits the fees that can be charged.
What Does a Reverse Mortgage Cost?
HECM costs that are accrued over the life of the loan include interest, a 0.5% FHA insurance premium and a monthly service fee of about $30. A HECM also has initial costs (such as the initial FHA insurance premium, origination fee, title insurance and appraisal and other closing costs) that are accrued at the beginning of the loan. All of the above fees can be financed as part of the loan. Lenders are required to provide potential borrowers with a “Total Annual Loan Cost Rate” or “TALC” disclosure which is the Federal Truth in Lending disclosure that estimates the cost of a reverse mortgage expressed as a percent over time. Because of the financed initial costs, projected TALC rates are higher in the early years and lower in later years and therefore a HECM is generally not appropriate for short term or small balance loans, but can be very appropriate for its intended purpose, as a long term solution. The “Annual Percentage Rate” or APR is also used to estimate of the cost of a fixed rate HECM. Potential borrowers should review the Federal Truth in Lending disclosures associated with the loan they are considering.
Why Doesn’t Everyone Have a Reverse Mortgage?
A Reverse Mortgage is only appropriate for seniors who want to “Age in Place,” that is, remain in their home, and where it is the best option. A Reverse Mortgage may not be the best option, for example, if the additional cash available is not sufficient to accomplish the homeowner's objectives. Also, although a Reverse Mortgage is often used to pay off an existing mortgage and eliminate mortgage payments, it may not be possible to do a Reverse Mortgage if the total of existing liens is greater than the amount available from the Reverse Mortgage. Finally, many who could utilize a Reverse Mortgage are not yet aware of the program, and Reverse Mortgages are an option that was simply not available to prior generations.
How Do I Go About Getting A Reverse Mortgage from AFC Reverse Mortgage?
- First you learn about reverse mortgages. We will be happy discuss reverse mortgages with you in your home or over the phone, to estimate the amount you qualify for, to explain the different programs, and a to answer any questions you or your relatives or advisors may have.
- Next, you’ll have a counseling session with a HUD approved counselor. Counseling is a consumer protection feature of the FHA HECM Reverse Mortgage program. We will provide you with a list of approved counselors or you can find a list on the FHA website (see below). You choose and contact the counselor. Counseling can be done over the phone or face to face. Lenders may not participate in counseling.
- Once you have completed your counseling, we process your loan. Processing includes a loan application, typical mortgage loan disclosures, and appraisal and title insurance.
- Finally, the loan can be closed in your home or at any location you choose.
Where Can I Get Additional Information?
See our "links" and "News" pges on this website and/or check out the following websites:
HUD/FHA
National Reverse Mortgage Lenders Association (NRMLA)
AARP Reverse Mortgage website
AARP Publication "Homemade Money"
Fannie Mae
Aging In Place Council
Counseling
HUD Reverse Mortgage Counselor Lists
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