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(Click Roadmap
if you missed it at the bottom of our home page.)
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). For
Fannie Mae's "HomeKeeper" mortgage, it must be a single family home, PUD, or
condominium.
Reverse mortgage programs generally do
not lend on cooperative apartments or mobile homes, 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 our Calculator 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.
- Fannie Mae's HomeKeeper creditline is flat. The remaining available
credit does not increase.
- Our Calculator shows you the initial
annual rate at which HECM creditlines are currently scheduled to grow. It also shows you
how much available credit would be left after 5 and 10 years if you you didn't draw any
prior to then.
- 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. The net value of that cash to you, however, may depend on other factors (see "What About Public Benefits?" below and "ALERT: Annuities").
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.
If a lender charges an origination fee that is greater than the amount that can be
financed with the loan, you have to pay the difference in cash at closing.
Back to Top
What are the other costs?
- The specific cost items vary from one program to another. Many of them are 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. Other types of costs can be
more exotic, and unique to reverse mortgages: monthly servicing fees,
"equity-sharing" fees, "shared appreciation" fees,
"maturity" fees.
- Although total loan costs between the HECM and
HomeKeeper programs can vary enormously, many of the individual cost items
within each program do not vary from one lender to another. Within each
program, 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 HomeKeeper programs. 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 given loan, 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.
Back to Top
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.
If you are considering a creditline, however, you need to know that
official TALC disclosures do not account for the added value of growing creditlines. If
you are a couple, you need to know that official TALC disclosures are all based on the
life expectancy of single owners. The total cost rates generated by NCHEC's Calculator correct these shortcomings.
One more key point: lenders don't have to show you TALC rates on a
loan until after you apply for it. So if you want to see and compare true,
total costs before you apply, be sure to deal with Sources that can meet your information needs. Ask them for a Personal Reverse Mortgage Analysis showing you all
your choices - including TALC rate comparisons generated by NCHEC software.
What's it worth?
Only you can decide what a reverse mortgage is worth to you. It
probably depends most on what you would use one for: increasing your monthly income,
having a cash reserve (creditline account) for irregular or unexpected expenses, paying
off debt that requires monthly repayments, repairing or improving your home, getting the
services you need to remain independent, or generally improving the quality of your life.
It may be helpful in evaluating the worth of a reverse mortgage to consider a major
alternative: selling your home and moving. Do you have any idea
- how much money you could get by selling your home?
- what it would cost to buy & maintain or rent a new one?
- how much you could safely earn on sale proceeds not used for a new home?
NCHEC's Personal Reverse Mortgage Analysis
estimates how much cash you could spend on housing each month using proceeds from the sale
of your home. So look into other housing options.
Seeing your housing alternatives first-hand and in-person may help you decide about a
reverse mortgage.
- You may find a different home, neighborhood, or community with an array of services or
amenities that is much more attractive than you would expect to find.
- Or, you may only confirm what you were pretty sure of all along: that where you live now
is easily the best place for you to be.
Either way, looking will give you a much better idea of the overall costs and benefits
of staying versus moving.That will give you a better sense of what's valuable to you. And
make it easier to evaluate the cost of a reverse mortgage.
Also take a look at other
financial and services options that you may prefer to - or combine with - a reverse
mortgage.
What about public
benefits?
Social Security and Medicare benefits are not affected by reverse
mortgages. But Supplemental Security Income (SSI) and Medicaid are different. In general,
these programs count loan advances differently than annuity advances.
- Loan advances generally do not affect your benefits if you spend them during the
calendar month in which you get them. But if you keep an advance past the end of the
calendar month (in a checking or savings account, for example), then it will count as a
"liquid asset." If your total liquid assets at the end of any month are greater
than $2,000 for a single person or $3,000 for a couple, you could lose your eligibility.
- Annuity advances reduce SSI benefits dollar-for-dollar, and can make you ineligible for
Medicaid. So if you are considering an annuity, and if you are now receiving - or expect
someday you may qualify for - SSI or Medicaid, check with the SSI, Medicaid, and other
program offices in your community. Get specific details on how annuity income would affect
these benefits.
Back to Top
What about taxes?
An American Bar Association guide to reverse mortgages advises that
generally
- the IRS does not consider loan advances to be income
- annuity advances may be partially taxable
- interest charged is not deductible until it is actually paid, that is, at the end of the
loan.
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What about
"borrowing"?
Many of us have been well served by these borrowing cautions:
- don't borrow in general
- don't borrow against your home in particular
- "Don't Borrow" Borrowing usually means using money you
haven't earned yet. You borrow today in the hope that you will be able to earn enough in
the future to repay it. So you are borrowing against your uncertain future earnings -
which sounds like "counting your chickens before they hatch." That's generally
not a good idea unless you have a steady job and good prospects.
But this caution doesn't really apply to reverse mortgages because you are not
borrowing against future income. In fact, you are borrowing against home equity that you
have already earned. So you aren't counting your chickens before they hatch. You are
hatching the nest egg you've already earned.
- "Not Against Your Home" Borrowing against your home
usually means paying back a loan every month. But if you lose your job or your income
drops, you could miss some payments and lose your home to foreclosure. That's why it's
generally not a good idea to borrow against your home unless it's for a very basic
purpose. You want avoid jeopardizing your home ownership.
But this caution doesn't apply to reverse mortgages either, because no monthly
repayment is required. You can't lose your home by missing a payment because there are
none to make.
Back to Top
What about "spending"?
Many of us have also been well served by these spending cautions:
"You don't know how much you will need and how long you will live. So don't spend
your savings. Wait till you really need them."
Makes a lot of sense. But - if you literally followed these cautions forever, you would
never use any of the money you spend a lifetime building up. And that doesn't make much
sense. Why go to the trouble of earning it and saving it if you're never going to use any
of it? So in retirement, this spending caution should be amended:
- when should you consider using how much savings?
- which savings (for example, home equity)?
As amended, this caution clearly does apply to reverse mortgages. Because the more home
equity "savings" you use now, the less you'll have later. So the questions now
become:
- If you ever do take a reverse mortgage, should you do it now or wait until later to
decide? (In the future, you may be eligible for more cash because you will be older and
your home may be worth more. On the other hand, interest rates may be higher, and that
would decrease the amount otherwise available.)
- If you take one now, how should you take it: creditline, monthly, or a combination? If
you take a creditline, how much of it should you use now versus later? If you take a
monthly advance, should you select a specific number of years, for as long as you live in
your home, or should you buy an annuity providing lifetime advances no matter where you
live?
A lot might depend on how much cash you'd qualify for today. Click Calculator for an estimate.
What about
"investing"?
Should you take a lump sum of cash from a reverse mortgage and
invest it someplace? Except for purchasing a sound
annuity, that's generally a lousy idea - unless, of course, you can afford to lose money.
Remember, to come out ahead on any investment, you'd have to earn a
greater rate of return on it than the TALC rate you are paying on the reverse mortgage.
And the odds against doing that safely are mighty long.
A much better alternative is to take a HECM creditline. You only get
charged interest on the cash advances you've actually taken, and the remaining available
credit grows larger every month. And this growth is not an "interest" earning,
so you are not taxed on it.
How much could you get in a HECM creditline, and by what rate would
it begin growing? Click Calculator for an estimate.
How should you shop?
First, take a look a look at the Alerts to
make sure you realize how important it is to be careful. Then try the Calculator to find out how much cash you could get and what
it would cost. If the numbers interest you, click Guidance
to learn how to get a free Personal Reverse Mortgage Analysis from selected Sources. Also investigate important related
alternatives or supplements to reverse mortgages.
What should you ask?
Ask selected Sources for an individually-customized, 12-page
"Personal Reverse Mortgage Analysis." Read it carefully, and ask questions about
it. But don't stop there.
Click Software to see all the
additional information NCHEC's "Reverse Mortgage Counselor" software can
generate for you. Ask the "what-if" questions it can answer in detail. For
example:
- If your are interested in a growing creditline:
"If I took out this much cash now and that much cash then (tell them how much and
when), how much cash would remain available to me at various future times, and how
would that compare with the remaining cash in a flat creditline?"
- If you want to see how total loan costs compare:
"Can you show me a chart that graphs
the TALC rates on these loans?
- If you want to see how your debt and equity
would change over time:
"Can you show me a chart that graphs my future debt and leftover equity on a specific
loan?""What would I owe and how much equity would I
have left if I sold and moved at various future times?
"How would those figures change if you assume the value of my
home grows at the average annual appreciation rate for my state over the past year, past
five years, or since 1980?" (Or any other rate you choose.)
- If you are a single male or a couple:
"TALC rates assume all borrowers are single females. What would the rates be if they
were based on the life expectancy of a single male my age (or of a couple our ages)?"
- If you are interested in monthly advances:
"TALC rates do not take into account the value of an annuity beyond the end of a
loan. What would the rates be if they did?"
Answers to these types of questions may be very helpful to you. And
they might be vitally important to you and your pocketbook. NCHEC's software can easily
answer these types of questions. Ask away!
ALERTS HELP INFO HOME
Copyright © NCHEC. All rights reserved.
Revised: March 12, 2001.
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