What is a reverse mortgage?
by Shawn Carvin, Senior Mortgage Banker
The proverbial “fixed income” has plagued many seniors with some very difficult financial decisions. If you own a home, you can consider selling it and using the proceeds to supplement your retirement income. But then you have to find a new place to live that may actually have higher monthly costs than your former home. However, there may be another option for you to consider: a reverse mortgage.
What is a reverse mortgage?
A reverse mortgage is aptly named. Instead of making a payment to a mortgage lender each month to pay down your debt and increase your equity, the lender pays you every month, increasing the amount you owe. The debt does not come due in your lifetime as long as you maintain the home as your residence and meet the other requirements of the reverse mortgage contract. You’re essentially converting the equity in your home into an annuity to supplement your retirement income, while continuing to live in your home. For many seniors, a reverse mortgage can greatly reduce or even eliminate the difficulties they face when living on retirement income.
Who is eligible for a reverse mortgage?
A reverse mortgage is a tool for individuals age 62 or older who own outright, or have significant equity in their primary residence. To be approved, a borrower has to show an ability to make the payments for property taxes and homeowner’s insurance, and to maintain the property in reasonable condition. In practice, funds to cover taxes and insurance can be withheld from monthly installment payments to the borrower, and be paid directly by the lender. If the borrower doesn’t own the home outright, the outstanding mortgage balance must be paid in full with the initial proceeds of the reverse mortgage.
The borrower must also reside in the home. If the primary borrower leaves the home for a period of more than 12 months – such as if they are admitted to a nursing home — the loan will come due. However, if the borrower is married, the spouse will be able to continue living in the home. If the spouse is a co-borrower, monthly payments to the spouse will continue.
What happens when the reverse mortgage comes due?
If the borrower passes away, vacates the home for more than a year, sells the home, or breaches the terms of the loan contract, the reverse mortgage comes due. At this time, the principal of the loan – the total amount paid out to the borrower over the life of the loan – must be repaid, along with the interest on that amount. If there are insufficient funds available to the borrower, their estate, or their family members to pay the principal plus interest, the lender will take title to the home, sell it, and retain the proceeds.
How much can you borrow?
The amount you can borrow is based on three factors: your age, the amount of equity you have, and the amount, if any, you currently owe on the house. The older you are, the more equity you have, and the less you owe, the more you will be able to borrow. This maximum loan amount available is currently $625,000.
What are some of the costs associated with reverse mortgages?
There is a loan origination fee — which is a small percentage of the loan amount — currently capped at $6,000. Annual premiums are baked into the terms of the loan. The borrower also has to pay an appraisal fee and standard closing costs, as well as a small monthly servicing fee. Most lenders require that you participate in financial counselling prior to loan approval. If so, the borrower bears the cost for this counseling, which can be incorporated in the closing costs.
Is a reverse mortgage right for you?
Like all major financial decisions, determining whether or not to supplement your retirement income with a reverse mortgage should not be taken lightly. It’s best to consult closely with a personal financial advisor and/or mortgage lending expert to help you decide if a reverse mortgage is the best solution for your unique needs.