Question and Answers
What types of homes are eligible?
What types of homes will not qualify for a reverse mortgage?
What's the difference between a reverse mortgage and a bank-originated home equity loan?
Why is it better to do a reverse mortgage versus simply refinancing the house with a traditional mortgage?
Are fixed rate loans available?
Are the closing costs and fees in a reverse mortgage high?
Can a reverse mortgage be taken out if there is already a conventional mortgage on the home?
How is the U.S. Government involved with reverse mortgages?
What about a home in a 'living trust'?
Will this income affect my Social Security or Medicare benefits?
Will I still have an estate that I can leave to my heirs?
Will I have any tax liability for the reverse mortgage proceeds?
Can the interest charged on my loan principal be deducted for tax purposes?
What is due when the loan is repaid?
What if I owe more than my home is worth?
Does the lender take the house?
When does the loan become due and payable?
Do I or my heirs have to sell the property to repay the loan?
How safe and secure are reverse mortgages?
Why haven't I heard more of reverse mortgages if indeed the benefit is so attractive?
Q. What types of homes are eligible?
A. Your home must be a single family dwelling or a two-to-four unit property that you own and occupy. Townhouses, detached homes, units in condominiums and some manufactured homes are eligible. Condominiums must be FHA-approved. It is possible for condominiums to qualify under the Spot Loan program. The home must be in reasonable condition, and must meet HUD minimum property standards. In some cases, home repairs can be made after the closing of a reverse mortgage.
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Q. What types of homes will not qualify for a reverse mortgage?
A. Generally vacation homes or secondary residences, mobile or manufactured homes not attached to a permanent foundation, rental properties of more than four units and homes on leased lands do not qualify.
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Q. What's the difference between a reverse mortgage and a bank-originated home equity loan?
A. With a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan, and you are required to make monthly mortgage payments. The reverse mortgage is different in that it pays you, and is available regardless of your current income. The amount you can borrow depends on your age, the current interest rate, other loan fees, and the appraised value of your home or FHA's mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow. You don't make payments, because the loan is not due as long as the house is your principal residence. Like all homeowners, you still are required to pay your real estate taxes and other conventional payments like utilities, but with an FHA-insured HUD Reverse Mortgage, you cannot be foreclosed or forced to vacate your house because you "missed your mortgage payment."
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Q. Why is it better to do a reverse mortgage versus simply refinancing the house with a traditional mortgage?
A. Two reasons a reverse mortgage is better:
First, with a reverse mortgage the senior doesn’t have to make monthly mortgage payments. With a traditional mortgage, monthly payments are required. Remember, with a reverse mortgage the principal and interest is not repaid until the borrower dies. If a married couple does a reverse mortgage, both must die ( or permanently move out of the house ) before the reverse mortgage must be repaid.
The second reason a reverse mortgage is better is because there is no “income or credit qualifying” with a reverse mortgage. If the person is 62 or older, he/she qualifies irrespective of his/her income. With a traditional mortgage, a person must have good credit and qualify from an income standpoint to support the borrower’s ability to make the monthly mortgage payments.
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Q. Are fixed rate loans available?
A. Yes, in some states. As the industry has grown, more products have been introduced. The fixed rate programs that are presently available however, limit the options available to the borrower and the interest rates are typically higher than that of the adjustable rate mortgage. Where the traditional adjustable rate HECM allows the borrower to select one of four options, the fixed rate requires the borrower to take the lump sum option only.
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Q. Are the closing costs and fees in a reverse mortgage high?
A. The fees and closing expenses on a reverse mortgage are higher than on a forward mortgage and typically run $5,000-$8,000. But here's an important thing to understand. The interest-rate on a reverse mortgage is substantially less than the interest rate on a forward mortgage. And this is significant because, on average, 82% of the total cost of any long term mortgage is in the interest rate, not in the closing costs and fees.
In evaluating these fees, here's the key thing to consider - how long do you anticipate staying in your home? If its long term and you can spread those fees over a number of years, the cost will likely be $500-$800 a year. Not bad at all. But alternatively, if you anticipate moving in the short term, getting a reverse mortgage may not be right for you. The reason is because if you can only spread those fees over a couple of years, it makes the reverse mortgage too expensive.
It is also worth noting the difference between how closing costs and fees on a reverse mortgage are handled versus how they are handled in forward mortgages. With forward mortgages, a borrower has an option. If the borrower wants to reduce or even eliminate closing costs and fees, he or she can do so by simply agreeing to increase the interest rate. As an example, if the fees and expenses on a regular mortgage are $4000 with an interest-rate of 5%, if the borrower wanted to, he or she could choose an interest-rate of 5 1/4 percent ( an increase of 1/4% ) and therefore have no fees or closing expenses. This is different from reverse mortgages. Adjusting the interest-rate and eliminating closing costs and fees is not allowed by HUD. The reason is for full disclosure. The government wants seniors to see exactly what the closing costs are as well as what the exact interest rate on the loan is. Unlike traditional mortgages, closing fees cannot be eliminated and built in to the interest rate on the loan.
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Q. Can a reverse mortgage be taken out if there is already a conventional mortgage on the home?
A. Yes, but existing mortgages must be paid off at closing. The proceeds from the reverse mortgage may be used for that purpose. This eliminates a monthly mortgage payment.
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Q. How is the U.S. Government involved with reverse mortgages?
A. Because of the lobbying efforts of AARP in the 1980's, the U.S. Government established the reverse mortgage program through HUD in 1989. It’s purpose was to provide a means for seniors to stay in their homes for the rest of their lives but obtain cash or income from the equity they built up in their home over the many years of making that monthly mortgage payment. The government did this for seniors because their earning capacity diminishes as they get older yet, due to rising medical costs as we age, expenses often go up.
Reverse Mortgages sponsored HUD is the U.S. Government’s response to the plight many seniors faced with being “home rich” but “cash poor”. It should be noted that the absolute last thing the government wants is a seniors program that takes advantage of seniors. For that reason, the U.S. Government has put in two very important safeguards.
Cap on fees and expenses - the interest rate and all fees associated with reverse mortgages have caps on them to protect seniors.
Required counseling for suitability - HUD requires that anyone getting a reverse mortgage make sure it’s right for them by getting “counseling” from a non-profit, approved counseling agency.
The counseling usually takes 45-60 minutes and the person is issued a counseling certificate.
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Q. What about a home in a 'living trust'?
A. A homeowner who has put the home in a living trust can usually take out a reverse mortgage, subject to review of the trust documents.
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Q. Will this income affect my Social Security or Medicare benefits?
A. NO. Money from a reverse mortgage is not considered income, nor does it affect Social Security or Medicare. Homeowners on SSI or Medicaid should observe pertinent rules.
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Q. Will I still have an estate that I can leave to my heirs?
A. When you sell your home or no longer use it for your primary residence, you or your estate will repay the cash you received from the reverse mortgage, plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs. None of your other assets will be affected by HUD's reverse mortgage loan. This debt will never be passed along to the estate or heirs.
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Q. Will I have any tax liability for the reverse mortgage proceeds?
A. Currently the Internal Revenue Service treats monies received from a reverse mortgage to be loan advances and not taxable income (consult your tax advisor).
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Q. Can the interest charged on my loan principal be deducted for tax purposes?
A. The interest accrues and is deductible when the loan balance and interest are paid after the borrower permanently leaves the property.
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Q. What is due when the loan is repaid?
A. The borrower pays back the cash advances they have received plus accumulated interest and any fees/costs that were financed.
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Q. What if I owe more than my home is worth?
A. All reverse mortgages are "non-recourse" loans, which means that the borrower can never owe more than the value of the home regardless of the loan balance.
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Q. Does the lender take the house?
A. This is a misconception. A reverse mortgage is merely a loan lien against the property. The title remains in the name of the borrower and the lender is only repaid the loan balance.
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Q. When does the loan become due and payable?
A. The loan is due and payable when the borrower sells the property, permanently leaves the home, or passes away. In the case of a couple, it is the second to move out or upon their death that triggers repayment. Until these events take place, you live in the home and make no payments to the lender.
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Q. Do I or my heirs have to sell the property to repay the loan?
A. No, repayment can be accomplished by refinancing the existing reverse mortgage with a conventional mortgage loan.
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Q. How safe and secure are reverse mortgages?
A. Reverse mortgages are sponsored by the U.S. Government through HUD. The fees and expenses that can be charged on a reverse mortgage are tightly regulated by HUD in order to protect the senior.
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Q. Why haven’t I heard more of reverse mortgages if indeed the benefit is so attractive?
A. The U.S. Government does not advertise benefit programs. The media, the approved lenders of the program and word of mouth are the primary communication sources for reverse mortgages. The reason the traditional mortgage industry has not pushed reverse mortgages is because the fees are substantially less than traditional mortgages due to the U.S. Government’s cap on reverse mortgage fees. These caps are put in place by the government to protect seniors. Accordingly, the traditional mortgage industry has severely limited its advertising for the reverse mortgage product.
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Reverse Mortgages of Kansas
A division of Priority Mortgage
900 N. Tyler, Suite 12, Wichita, Kansas 67212
316.832.2221 (office) 316.721.7782 (fax) 316.655.5590 (mobile) 877.622.8200 (toll free)
info@reversemortgagesofks.com
Kansas Mortgage License # 1996-0122