Most people have, or had, a conventional mortgage using them to purchase their home or have refinanced …yet the reverse mortgage is often misunderstood.
A reverse mortgage is a mortgage where the lender puts a lien against the property, just like conventional mortgage, but with special terms for those 62 and older.
The Home Equity Conversion Mortgage or HECM, the most common reverse mortgage is insured by FHA for the purpose of providing a valuable financing alternative for senior homeowners to help them remain in their home and have access to funds by withdrawing a portion of their home equity.
Let’s compare the two.
| Conventional/Traditional Mortgage | Home Equity Conversion Mortgage (HECM) Reverse Mortgage | |
| Loan Collateral | It is a loan using the home as collateral. | It is a loan using the home as collateral. |
| Title/Ownership | The title stays in the borrower’s name, they remain the homeowner. | The title stays in the borrower’s name, they remain the homeowner. |
| Interest Rate
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Interest rate can be impacted by one’s income and credit score. Limited income and poor credit means a higher interest rate. | Income or credit scores don’t affect the interest rate.
|
| Qualifying
|
Income and credit history and scores are used to for qualifying; low income or and a poor interest may mean one doesn’t qualify for the conventional mortgage.
|
Income and credit history are used to for qualifying; to determine if borrowers meet HUD’s Financial Assessment requirements. If one has a history of late payments on debt and a low residual income a Life Expectancy Set Aside may be necessary. Under some circumstances they may not qualify. |
| Closing Costs
|
Closing costs include origination fee, appraisal, title and recording fees.
If doing a “Forward” FHA Mortgage Insurance Premiums are charged. On conventional mortgage one may purchase Mortgage Insurance. Closing costs are comparable to reverse mortgages…I’ve done side-by-side comparisons. (Contact us for a copy.) |
Closing costs include origination fee, appraisal, title and recording fees.
FHA Mortgage Insurance Premiums are charged.
Closing costs are comparable to any conventional mortgage…I’ve done side-by-side comparisons. |
| Loan Amount Borrowed
|
Amount borrowed is based on appraised value of home, credit score and program chosen.
|
Initial amount borrowed is based on the age of the youngest homeowner, appraised value or FHA Lending Limit, expected interest rate and program chosen.
Over time the amount borrowed increases with the interest rate, FHA Mortgage Insurance Premium and draws being added to the loan balance. At some point it is possible to borrow more than the value of the home at the time the loan was initiated. If payments are made (they are optional), then they could decrease the loan balance. |
| Receipt of Funds
|
Conventional mortgage funds are drawn as a lump sum.
Home Equity Line of Credit (HELOC) creates a line of credit for a specific term and specific amount. |
Can receive funds as monthly payments, line of credit, lump sum or a combination of these.
Line of credit grows so more funds become available over time. |
| Use of Funds
|
Borrowers purchase a home or refinance to have funds for what they need or want.
|
Borrowers benefit by having access to funds for whatever they need or want. It can be used for more immediate needs or as a financial planning tool or even to purchase a home. |
| Monthly Mortgage Payments
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With a conventional mortgage or HELOC one has to make monthly mortgage payments. If the mortgage payments aren’t made, usually within 3 to 4 months, the foreclosure process will begin. | The advantage is they don’t have monthly mortgage payments to make which takes away the risk of foreclosure from not making a monthly mortgage payment. |
| Payment Requirements
|
Payments are required to be made. One has to refinance to access more funds.
|
Payments can be made, it’s a choice of the borrower as to when, how much, how often. Making payments reduces the loan balance.
With the adjustable rate the funds are applied to the line of credit and can be borrowed without refinancing. |
| Interest
|
Interest is paid each month along with the principal. Reducing the loan balance over the term of the loan.
If one has a balloon payment the full payment would be required at the end of the loan term…generally 10 to 15 years. |
Interest is accrued over the life of the loan. This increases the loan balance over the term of the loan.
If one chooses to make payments, the loan balance will be decreased by the of payment made. |
| Borrower’s Responsibilities
|
Borrowers are responsible for keeping insurance on the property, paying property taxes and maintaining the home. As long as they abide by the terms of the loan they are not forced from their home.
If they don’t abide by the terms of the loan, they risk a foreclosure. |
Borrowers are responsible for keeping insurance on the property, paying property taxes and maintaining the home. As long as they abide by the terms of the loan they are not forced from their home.
If they don’t abide by the terms of the loan, they risk a foreclosure. |
| Loan Term/Due Date
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It is a loan and does need to be repaid over the life of the loan. A conventional mortgage loan term is generally 15 or 30 years. A HELOC’s loan term is generally 10 to 15 years.
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It is a loan and does need to be repaid at the end of the loan term. The reverse mortgage loan is not due and payable until the home is no longer the primary residence of the borrower or on their 150th birthday. (Or if they don’t abide by the terms of the loan.) |
| Equity Difference When Sold
|
When the loan is being repaid, if the home is sold for more than the loan balance, the borrower or their heirs receive the difference. | When the loan is being repaid, if the home is sold for more than the loan balance, the borrower or their heirs receive the difference. |
| Non-Recourse
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Conventional loans can be non-recourse; it’s determined by the lender. Without the non-recourse factor the lender can be repaid from other assets of the borrower. | All reverse mortgages are non-recourse which means there is no personal liability to the borrower or their heirs. The loan is paid back only from the property. |
| FHA Mortgage Insurance Premium Covers
|
If the loan balance is higher than what the home can be sold for when the loan is due, the FHA Mortgage Insurance covers the difference to the lender; the borrower or their heirs or tax dollars don’t cover this difference. |
| Staying in home when all funds used
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Borrowers stay in their homes even when all funds are drawn as long as they abide by the terms of the loan.
|
Once a reverse mortgage is in place, even if one draws all the funds available from the reverse mortgage, the borrowers can stay in their home as long as they abide by the terms of the loan, i.e. pay property taxes and insurance, HOA dues if applicable, and maintain the home. |
| Protections
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No counseling required.
|
Requires counseling by a HUD approved 3rd party counselor as a protection to help borrowers understand the details of the reverse mortgage. The processing cannot start until the counseling has occurred.
HUD regulates what lenders and third-parties may charge stating they must be customary and reasonable costs necessary to close the mortgage. Mark-ups are not allowed. Disclosures and sample closing documents must be provided to borrowers at application. |
| Lender/Bank and Investor Benefit
|
Lender makes money on the interest.
Would you loan money without receiving a benefit? |
Lender makes money on the interest.
Would you loan money without receiving a benefit? |
As with any financial product, or any purchase for that matter, one should get the facts and understand the terms.
The loan officer one is working with should be explaining the features and terms of the reverse mortgage. Yes, unfortunately there are bad apples in every industry but that doesn’t mean the product is bad. The reverse mortgage industry has implemented protections to prevent borrowers from scam.
Understanding reverse mortgages one might find the reverse mortgage is a more viable option for their situation.
For further details on the reverse mortgage contact us if you are in Minnesota. As your local broker, we work with several lenders and provide free information and facts with no obligation, meeting in person whenever possible. For other states, contact your local reverse mortgage specialist who is a broker, one who works with several lenders, has their Broker License/NMLS and preferably holds the Certified Reverse Mortgage Professional (CRMP) designation.
© 2016-2018 Beth Paterson, CRMP, Beth’s Reverse Mortgage Blog, 651-762-9648
This material may be re-posted provided it is re-posted in its entirety and without modifications and includes the contact information, copyright information and the following link: http://wp.me/p4EUZQ-1zP
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- Reverse Mortgage Misconceptions Continue; You Need To Get The Facts!
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Blog posts’ information is current as of date post published, program is subject to change in the future. Contact us for current information, 651-762-9648.
This site or the information provided is not from, or approved by, HUD, FHA, or any US Government or Agency.