A reverse mortgage is an FHA loan product that allows a consumer to convert a portion of their home equity into cash. Unlike a traditional home equity loan or second mortgage, Home Equity Conversion Mortgages (HECM) borrowers do not have to repay the HECM loan until the borrower(s) no longer use the home as their principal residence or fails to meet the obligations of the mortgage. Consumers can use reverse mortgages to purchase a primary residence or refinance one. If you choose to use a reverse mortgage to purchase a home then you will need to pay the difference between the reverse mortgage proceeds and the sales price plus closing costs for the property you are purchasing.
While using a reverse mortgage for a purchase is possible, it is rare. Most consumers use reverse mortgages as a refinance tool to gain access to the equity in their home in one of the following ways:
There are many reasons that a consumer might use a reverse mortgage. Here are some common scenarios where a reverse mortgage would be an outstanding resource:
Scenario #1: A consumer and their spouse own their home outright and receive monthly income from Social Security and a small pension from a previous job. Together, the income from the pension and Social Security doesn't bring in enough income to meet the consumers needs. The consumers take out a reverse mortgage that will pay them an additional $1,200 each month for the rest of their lives. Since the money they take from the equity in their home requires no monthly repayment, the $1,200 paid to them each month bridges the gap to provide enough money for the consumer to live out their golden years comfortably.
Scenario #2: A consumer and their spouse own their home but have a small balance left to repay. They receive retirement benefits from their previous career and live comfortably on their monthly retirement income. However, from time to time additional funds are required for them to live out the retirement they always hoped for. Whether to take the family on an annual vacation without having to reduce their monthly spending to save for it or for unforeseen expenses such as dental bills, auto repairs or unexpected expenses, they want to be able to access the equity in their home when they want or need to. The consumers take out a reverse mortgage and use the proceeds as a credit line that they can draw from at will up to the maximum credit line amount without ever having to repay the money they take. This allows the consumers to access their home equity when wanted or needed without have to worry about budgeting for additional expenses.
Scenario #3: Upon the death of a spouse, a pension or retirement funds will cease to be paid. In order to bridge the gap that was once provided for by the pension or retirement funds, the surviving spouse takes out a reverse mortgage in both a small lump sum to cover immediate costs and they arrange a structured monthly payment of $925 each month to replace the lost pension income allowing the surviving spouse to stay in the family home and meet the necessary monthly expenses.
To be eligible for a FHA Reverse Mortgage, Consumers must meet all of the following criteria:
A reverse mortgage comes due under the following conditions:
Q. How much money can I get from my home?
A. FHA calculates the maximum mortgage which will depend on the amount of equity a consumer has, the age of the youngest borrower and current interest rates.
Q. What are the differences between a reverse mortgage and a home equity loan?
A. With a second mortgage, or a home equity line of credit, borrowers must make monthly payments on the principal and interest. With a reverse mortgage there are no monthly principal and interest payments.
Q. Will we have an estate that we can leave to heirs?
A. When the home is sold or no longer used as a primary residence, the cash, interest, and other HECM finance charges must be repaid. All proceeds beyond that amount belong to the consumer, the consumer's surviving spouse or their estate. This means any remaining equity will be transferred to a consumers heir but, in the event that the consumer outlives the mortgage and a negative balance occurs, no debt is passed along to the estate or heirs.