The mere mention of a Reverse Mortgage stirs up misconceptions and myths in the minds of many people – fears that the bank will own their home, that there is no way out of a Reverse Mortgage, or that the family will be “robbed” of their inheritance, to name a few.
Since their inception over 30 years ago, the Federal Housing Administration (FHA) has addressed consumer concerns and today there are protections for borrowers built into the Reverse Mortgage product. It is a safe means of accomplishing financial goals for qualified and eligible homeowners who would like to convert a portion of their home equity into tax-free money and achieve retirement security.
How does it work? Many Seniors have questions.
Q: Will I still own my home?
Yes, you are not relinquishing title or ownership. You are borrowing against the value of your home. The bank does not own your home, just like with a conventional loan.
Q: Do I lose the equity in my home?
No, you are only using a portion of the equity to secure the loan. If your home is valued at $300,000 and you have a reverse mortgage for $150,000 you still have 50% equity that remains in your home.
If the interest rate on your reverse mortgage loan is 4.25%, because you no longer make monthly principal and interest payments, your mortgage balance will grow at approximately 4.25% a year. At the same time, on a national basis, homeowners experienced housing appreciation of 3.7% from 1968 to 2009 (Ref: Case-Schiller Index). Most people still assume that over the next 15 years your home will appreciate. If you use the national historical appreciation rate of 3.7%, and your mortgage balance grows at 4.25%, then in this scenario you will lose less than 1% of your equity per year. *Past historical appreciation is not a guarantee of future appreciation.
Q: Is there a prepayment penalty?
No, you may repay the Reverse Mortgage at any time.
Q: Can I pay off the Reverse Mortgage at any time with cash, a new conventional loan refinance, or by selling the property and paying the balance off while keeping the remaining equity?
Yes, these are all viable options.
Q: If I pass away, can my spouse stay in the home without a mortgage payment until he/she passes away or moves out of the home?
Yes, your spouse will never be forced to leave his/her home as long as the property taxes and homeowners insurance are paid, and the home is maintained.
Q: If I am 62 or older, and my spouse is under 62, are we disqualified due to her age?
No, only one borrower must be 62 or over.
Q: If my wife and I both pass away, can our heirs sell the house, payoff the existing Reverse Mortgage balance and retain the equity left in the home?
Yes, your heirs will have access to the remaining equity after paying off the balance of the Reverse Mortgage.
Q: What if the loan amount ends up more than the value of the home?
Reverse Mortgages are non-recourse loans meaning if the loan balance ends up surpassing the value of your home, the lender cannot collect more than the value of the home. The difference between the loan balance and the home value is covered by the FHA insurance fund.
The amount of money that will be available to you is determined by the appraised value of your home, the amount of equity in your home, and the age of the homeowners. Contact your Reverse Mortgage Specialist for additional information and a proposal created just for you.
This article first appeared in My Primetime News, October 6, 2015.