What's a reverse mortgage?
A loan against your home that requires no repayment for as long as you live there.
How's it different?
To qualify for most loans, the lender checks your income to see how much you can afford to pay back each month. But with a reverse mortgage, you don't have to make monthly repayments. So your income generally has nothing to do with getting the loan or the amount of the loan. With most home loans, if you fail to make your monthly repayments, you could lose your home. But with a reverse mortgage, you don't have any monthly repayments to make. So you can't lose your home by failing to make them.
Who can get one?
You must own your home, and generally all of the owners must be at least 62 years old. Your home generally must be your "principal residence" - which means you must live in it more than half the year. For the federally-insured "Home Equity Conversion Mortgage" (HECM), your home must be a single-family property, a 2-4 unit building, or a federally-approved condominium or planned unit development (PUD). During 2001, cooperatives are also expected to made an eligible property for a HECM. Most mobile homes are not eligible, although some "manufactured" homes may qualify if they are built on a permanent foundation, classed and taxed as real estate, and meet other requirements.
If you have any debt against your home, you must either pay it off before getting a reverse mortgage or - this is what most borrowers do - use an immediate cash advance from the reverse mortgage to pay it off. If you don't pay off the debt beforehand, or do not qualify for a large enough immediate cash advance to do so, you cannot get a reverse mortgage.
How much cash can you get?
The amount of cash you can get from a reverse mortgage depends on the program you select and - within each program - on your age, home, and interest rates. It can vary by a lot from one program to another. A typical consumer might get $30,000 more from one program than from another. But no single program works best for everyone.
For all but the most expensive homes, the federally- insured "Home Equity Conversion Mortgage" (HECM) generally provide the most cash.
Within each program, the amount of cash you can get depends on the age(s) of the owner(s), the value (and in some cases the location) of the home, and current interest rates. In general, the most cash goes to the oldest borrowers living in the homes of greatest value at a time when interest rates are low. On the other hand, the least cash generally goes to the youngest borrowers living in the homes of lowest value at a time when interest rates are high.
But remember, the total amount of cash you actually end up getting from a reverse mortgage will depend on how it's paid to you plus other factors.
How's it paid to you?
That's up to you. You could take it as an immediate cash advance at closing, that is, a lump sum of cash paid to you on the first day of the loan a creditline account that lets you take cash advances whenever you choose during the life of the loan - until you use it all up OR as a monthly cash advance for a specific number of years that you select, OR for as long as you live in your home, OR - if you use the loan to buy an annuity - for the rest of your life, no matter where you live OR as any combination of immediate cash advance, creditline account, and monthly cash advance
Use the calculator at www.aarp.org/revmort/ to estimate how much cash you could get from a reverse mortgage.
How much total cash?
If you take a creditline account, the total amount of cash you actually get will depend on two things: how much of your available creditline you use, and whether the creditline is "flat" or "growing."
With a flat creditline, the amount of remaining available credit at any time only changes if you take a cash advance, at which point it decreases by the amount of the advance. For example, if you have a flat $50,000 creditline and take out $10,000, you would have $40,000 left whenever you decided to take more.
But with a growing creditline, your remaining available credit grows larger by a given rate. For example, if you took $10,000 from a $50,000 creditline that grows by 8% each year, and then came back for more three years later, there would then be over $50,000 left to use - because the remaining $40,000 growing at 8% per year would become $50,388 after three years. So a growing creditline can give you a lot more cash over time than a flat one. That’s why you need to look at more than the size of a credit-line when a reverse mortgage starts. You also should consider how much available credit would be left in the future. This will also depend, of course, on how much you take out and when you take it.
The creditline in the Home Equity Conversion Mortgage (HECM) program grows larger each month by the same rate as the one being charged on the loan balance. It keeps growing for as long as there is any credit left, that is, until you withdraw all your remaining credit. For a sample comparison of creditline plans, click here. If you take monthly loan advances, the total amount of cash you actually get will depend on whether you select a plan that sends them to you for a specific number of years, or for as long as you live in your home. It will also depend how long you actually live in your home.
If you use a reverse mortgage to buy an annuity, the total amount of cash you actually get will depend on how long you live - no matter where you live.
What happens to your debt?
It grows larger and larger as you keep getting cash advances, make no repayment, and interest is added to the amount you owe (your "loan balance").
That's why reverse mortgage are called "rising debt, falling equity" loans. As the amount you owe (your debt) grows larger, your equity (that is, your home's value minus any debt against it) generally gets smaller.
That why it's called "reverse"?
Yes. In a "forward" mortgage (the kind you normally use to buy a home), your regular monthly repayments make your debt go down over time until you have it all paid off. Meanwhile, your equity is rising as you owe less and less, and as your property value grows (appreciates).
So forward mortgages are "falling debt, rising equity" loans - just the opposite of reverse mortgages. Here's another way to think of it. In a forward mortgage, you use debt to turn your income into equity. In a reverse mortgage, you use debt to turn your equity into income. You are reversing the deal you used to buy your home. Then, you had income and wanted equity. Now, you have equity and want income. In both cases you use debt to turn what you have into what you want.
When do you pay it back?
When the last surviving borrower dies, sells the home, or permanently moves away. "Permanently" generally means you have not lived in your home for 12 months in a row. You might also have to pay it back if you fail to pay your property taxes, fail to keep up your homeowner's insurance, or let your home go to waste. But if you do, the lender may be able to make extra cash advances to cover these expenses.
Just remember, reverse mortgage borrowers are still homeowners and therefore are still responsible for taxes, insurance, and upkeep.
What do you owe?
The total amount you will owe at the end of the loan (your "loan balance") equals all the cash advances you've received (including any that were used to pay loan fees or costs) plus all the interest on them up to the loan's "nonrecourse" limit (see answer to next question).
Interest rates can change based on changes in published indexes. But the more adjustable they are, the lower they start – so they give you larger cash advances. And they will be lower than less adjustable rates all during the time that index rate changes don’t exceed the caps on the less adjustable rates.
What's the most you can owe?
You can never owe more than the value of the home at the time the loan is repaid. Reverse mortgages are generally "nonrecourse" loans, which means that in seeking repayment the lender does not have recourse to anything other than your home. Not your income, your other assets, or your heirs.
So even if you receive monthly loan advances until you are aged 115, your home declines in value between now and then, and the total of monthly advances becomes greater than your home's value - you can still never owe more than the value of your home. If you or your heirs sell your home in order to pay off the loan, the debt is generally limited by the net proceeds from the sale of your home.
How do you pay it?
If you sell and move, you would most likely pay back the loan from the money you get from selling your home. But you could pay it back from other funds if you had them.
If the loan ends due to the death of the last surviving borrower, the loan must be repaid before the home's title can be transferred to the borrower's heirs. The heirs could repay the loan by selling the home, using other funds from the borrower's estate or their own funds, or by taking out a new forward mortgage against the home.
What's left?
Not all reverse mortgage borrowers end up living in their homes for the rest of their lives. Some who expect to remain living there change their minds. Others face later health problems that require a move.
So it makes sense to plan for the possibility that you may sell and move some day.
How much equity would be left if you did?
If, at the end of the loan, your loan balance is less than the value of your home (or your net sale proceeds if you sell), then you or your heirs get to keep the difference. The lender does not "get" the house. The lender gets paid the amount you owe, and you or your heirs keep the rest.
IMPORTANT: If you take the loan as a creditline account, be sure to withdraw all remaining available credit before the loan ends. You will have the money sooner that way, and it could be more than otherwise might be left. For example, a growing creditline could become greater than the leftover equity in some cases.
If you have purchased an annuity and then sell your home, you could continue receiving monthly annuity advances for the rest of your life. If the loan ends due to the death of the last surviving borrower, and if the annuity purchased by the borrower includes a death benefit or "period certain" payments, then the annuity's beneficiaries would receive additional cash.
What's the out-of-pocket cost?
The out-of-pocket cash cost to you is most often limited to an application fee that covers a property appraisal (to see how much your home is worth) and a minimal credit check (to see if you are delinquent on any federally-insured loans).
Most of the other costs can be "financed" with the loan. This means that you can use reverse mortgage funds advanced to you at closing to pay the costs due at that time, and later advances to pay any ongoing costs. The advances are added to your loan balance, and become part of what you owe - and pay interest on.
What are the other costs?
Most are generally of the same type found on "forward" mortgages: interest charges, origination fees, and whatever third-party closing costs (title search & insurance, surveys, inspections, recording fees, mortgage taxes) are required in your area. Reverse mortgages also typically include some type of "risk-pooling" or "reverse mortgage insurance" premium and a monthly servicing fee.
Although total loan costs between one program and another can vary enormously, many of the individual cost items within each program do not vary from one lender to another. Within the HECM program, for example, the costs that may be different from one lender to another are generally the origination fee and the servicing fee. So if you've decided on HECM you want to get the best deal, these are the specific fees to compare.
The largest total cost differences you will find are the ones between different programs, for example, between the HECM and Fannie Mae's "Home Keeper" program. But it is virtually impossible to evaluate or compare the true, total cost of reverse mortgages unless you consider their Total Annual Loan Cost (TALC) rates.
What's the total cost?
Federal Truth-in-Lending law requires reverse mortgage lenders to disclose the projected annual average cost of these loans in a way that includes ALL of the costs and benefits, and also takes into account the nonrecourse limits.
This Total Annual Loan Cost (TALC) disclosure shows you what the single all-inclusive interest rate would be if the lender could only charge interest and not charge any other fees. Specifically, it tells you the annual average rate that would produce the total amount owed at various future points if only that rate were charged on all the cash advances you get that are not used to pay loan costs. In other words, it shows you what you are paying in total for the money you get to spend.
How does the total cost vary?
On any loan with a given pattern of loan advances, TALC rates depend on two major factors: time and appreciation. TALC rates are generally greatest in the early years of the loan and decrease over time, for two reasons 1) the initial fees and costs become a smaller part of the total amount owed, and 2) the likelihood increases that the rising loan balance will catch up to - and then be limited by - the nonrecourse limit.
TALC rates also depend on changes in a home's value over time. The less appreciation, the greater the likelihood will be that a rising loan balance will catch up to - and then be limited - by the home's value. On the other hand, when a home appreciates at a robust rate, the loan balance may never catch up to (and be limited by) it.
What's that mean?
If you end up living in your home well past your life expectancy or your home appreciates at a low rate, you might get a true bargain. But if you die, sell, or move within just a few years or your home appreciates a lot, the true cost could be very high.
There's no way of avoiding this fundamental risk. You just have to understand it in general, assess the potential range of TALC rates on a specific loan, and decide if it's worth the benefits you expect you'll get from the loan.
Just remember, TALC rates are not really comparable to the Annual Percentage Rates (APRs) quoted on "forward" mortgages because unlike APRs, TALC rates include all the costs unlike APRs, TALC rates do not assume you take all of the loan on the first day (if they did, TALC rates would be much closer to APRs)
It's also important to remember that you get benefits from a reverse mortgages that you don't get from a "forward" mortgage:
- No monthly repayments, and no repayment of any kind for as long as you live in your home
- an open-ended monthly income guarantee, or a guaranteed creditline (which may grow larger until you use it all)
- a total debt limit equal to the net value of your home (even if it's less than what your loan balance would otherwise have been), no matter how long you live, and no matter what happens to the value of your home
So you may pay more for a reverse mortgage. But the benefits are not available on any other type of debt. And - if you live long, or if your property value doesn't grow much - you can end up with a lower than expected cost.