Hamptons Reverse Mortgages
WHAT IS A REVERSE MORTGAGE?
A reverse mortgage is a financial agreement with a lender that allows senior homeowners to borrow money from their home’s equity. It is available to properties classified as single-family, including houses, condos and townhouses. The home must be owned free and clear or have enough equity to act as collateral. The amount of funds available from a reverse mortgage is based on the age of the youngest borrower, the amount of equity in the home, the value of the home, and the current interest rates. The funds received are tax-free and may be used at the homeowners discretion.
The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), a program insured by the Federal Housing Administration since 1988. Age requirement is 62 and up and in a high-cost area like Long Island, home value peaks at $1,089,300. HECM funds may be taken in a lump sum, a line of credit, monthly payments, or a combination thereof.
Less common is the Proprietary Reverse Mortgage (Jumbo), offering loans up to $4,000,000 for homes with a higher value. These loans are NOT insured by the FHA, and the age requirement is 60 and up. Jumbo funds may be taken in lump sum only and cannot be paid down before the mortgage is paid in full.
For both HECM and Jumbo, loan repayment is only required when the last surviving borrower vacates the home permanently or fails to maintain property taxes and homeowner’s insurance. Once the loan is repaid, any remaining equity is returned to the homeowner or passed to their heirs, however a will or trust dictates. If the loan balance exceeds the home value at time of maturity, no obligation will pass to the borrowers’ heirs as reverse mortgages are non-recourse debt. Both HECM and Jumbo loans can be satisfied at any time upon the sale of the property or other full repayment of the loan but only the HECM loan can be partially paid down.
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HOW A REVERSE MORTGAGE WORKS
A reverse mortgage is exactly what it sounds like - it operates in reverse from a traditional, or “forward” loan. The traditional loan decreases debt as it is paid off, increasing equity in the property. A reverse mortgage loan decreases equity, raising debt when money is taken out.
Although repayment is not required on a reverse mortgage, it is allowed on FHA HECM loans and there is never a prepayment penalty of any kind. The borrower can make a payment at any time, up to and including payment in full, if they so desire. Many borrowers choose to repay some or all the accruing interest, but that is not necessary. At the end of the loan’s lifespan, the borrower’s heirs receive the equity in the house after the loan payoff.
HOW MUCH YOU ARE ELIGIBLE TO RECEIVE
The amount of money that can be received from a reverse mortgage is based upon several factors but is generally up to 25% - 50% of a home’s value. The older you are, the more you can receive, as loan amounts are based primarily on your life expectancy and current interest rates.
A reverse mortgage is dictated by the following:The age of the youngest borrower
The amount of equity in the home
Value of the home or the 2022 lending limit (whichever is less)
Total value of home if Jumbo mortgage
The interest rates in effect at the time
Costs to obtain the loan (which are subtracted from the Principal Limit)
Existing mortgages and liens (which must be paid in full)
HOW ARE REVERSE MORTGAGES DIFFERENT FROM HOME EQUITY LOANS?
The reverse mortgage has greater flexibility than any other loan currently being offered such as equity loans or HELOC’s, although it has additional steps for qualification.
REVERSE MORTGAGE
A reverse mortgage (up to $1,089,300) requires that the borrower undergo a counseling session to make sure this product is the right fit for the homeowner’s situation. It also requires that borrowers pay FHA (HUD) mortgage insurance on the HECM program. No payments are required during the lifetime of the borrower but the loan must eventually be repaid by the borrower’s heirs or by the sale of the house. Prepayments by the homeowner are allowed without penalty. The reverse mortgage is also available as a line of credit and is insured by HUD. The lender cannot lower or close it at will but the HECM line will increase if interest rates go up on the remaining balance. In fact, the line of credit on the unused portion grows over time and borrowers can receive more funds available later when needed rather than less at the lender’s discretion. Since the loan is insured, if anything were ever to happen to the lender, the loan would be assigned to a new lender or HUD and the loan would remain in effect as written.
JUMBO REVERSE MORTGAGE
A Jumbo reverse mortgage (up to $4,000,000) requires that the borrower undergo a counseling session to make sure this product is the right fit for the homeowner’s situation. No payments are required during the lifetime of the borrower but the loan must eventually be repaid by the borrower’s heirs or by the sale of the house.
HELOC (Home Equity Line of Credit)
A HELOC or Home Equity Line of Credit is a bank product that is relatively inexpensive and quick to obtain. However, like most loans, there is a tougher standard to qualify for the loan underwriting and it is not as friendly for seniors on a fixed budget. Borrowers must qualify for a HELOC with traditional income and debt ratios that often require them to make monthly payments of at least interest only early in the term of the loan and then may increase up to three times the amount of the early payment to include principal payments as well later in the loan during the repayment period. It is at this time that the lender may no longer allow borrowers to take additional draws from the line of credit and as is the case with senior borrowers especially, their income may have decreased from the time they originally obtained the loan making it even harder to repay it in the remaining term. The lender can also freeze, lower the amount available or close the HELOC at any time according to their own discretion.
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A reverse mortgage is a way to use your home’s equity to get cash for:
- A Home Renovation
- A Grandchild’s College Education
- Travel
- In-Home Nursing Care
- Supplemental Income
- Or Anything Else You Want
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Interest rates are generally higher than regular market rates, as are the closing costs.
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On average, 25% - 50% depending on the age of the borrower(s).
The amount of money you can receive from a reverse mortgage loan is based on the youngest borrower’s age, current interest rates, and your home’s appraised value. Reverse mortgage principal limit factors are based on actuarial tables. If there are multiple borrowers, the age of the youngest borrower will lower the amount available as the terms allows borrowers to live in the home for the rest of their lives.
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Depending on what kind of reverse mortgage you use, there are several ways you can receive your funds:
- Cash lump sum (the only way for Jumbo)
- Line of credit
- Payment for a set amount and period
- Guaranteed payment for life (“tenure payment”), which acts if you live in your home
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You do. You are not selling your property to the lender in order to obtain a reverse mortgage, and are just taking out a loan that works differently than a traditional or “forward” loan.
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Yes. In 2014 HUD introduced new rules to protect non-borrowing spouses. This is important to confirm with your lender or counselor to make sure all qualifications are met. A non-borrowing spouse can stay in house but does not have access to credit line. All homeowners on the property deed must be on loan or the deed must be amended prior to loan to remove the non-borrower’s name.
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The borrower can prepay the reverse mortgage or it becomes due after the borrower’s death, payable by the heirs or the lender selling the property.
A reverse mortgage does not require monthly mortgage payments and therefore the loan is paid back when the loan reaches a maturity event or if the homeowner decides to sell their home or pay it off through other means. When a reverse mortgage borrower passes away, the heirs to their property can either pay off the balance with their own funds or refinance to keep the property or sell the home in order to pay off the balance of the loan. The reverse mortgage is non-recourse so you can never owe more than the value of the home. If an heir inherits the property with a balance that exceeds the current market value, they are not required to pay back the loan balance or even attempt to sell the property if they do not choose to and can sign the property over to the servicer to handle from there and any loss on that sale is covered by the mortgage insurance fund.
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Yes, your house is still yours.
You can sell your house at any time when you have a reverse mortgage and there is no prepayment penalty to do so.
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Yes. When taking a reverse mortgage, you agree to maintaining your property charges such as taxes and homeowner’s insurance and occupying your home as your primary residence. (Defined by not leaving longer than a 6-month period). Should you fail to maintain the loan agreement the servicer is required by HUD to call the loan due and payable. Some borrowers are required to have taxes and insurance included.
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The property must be your primary residence and the closing costs are higher. Like any financial decision, using a reverse mortgage depends on your personal situation. A reverse mortgage is often used by seniors looking to increase their liquidity or supplement their income during retirement. The decision to take a reverse mortgage should always be looked at as an individual approach weighing long-term suitability. If you can stay in your home for the foreseeable future and the reverse mortgage allows you to live more comfortably the reverse can be a great idea! If you have plans to move later in retirement you should look at alternatives such as the reverse mortgage for home purchase, or other home equity loans.