How A Reverse Mortgage Works
Rick May explains the Reverse Mortgage process with text and videos.
Note: links below are to additional videos in the Learning Center.
How Does A Reverse Mortgage Work?
As Rick explains in the video, “How Do People Use a Reverse Mortgage?” (right) most reverse mortgage borrowers use it because they want or need more money to retire comfortably, especially in today’s very stressed economy. You may want to:
- Eliminate your mortgage payment, immediately increasing your cash flow.
- Have more money to enjoy your life, take a trip, remodel the house, buy a car, help a loved one, anything…
- Pay off medical expenses, bills or get rid of more expensive debt, e.g., credit cards.
- Have a rainy-day fund or line of credit that requires no payments.
Enjoy the four major benefits of a reverse mortgage. You can:
- Remain in your home, without mortgage payments.
- Get immediate access to your money – tax-free! – in any one or a combination of these three ways: A) Lump-sum, B) monthly payments wired into your account automatically, C) Line of credit.
- Spend your money as you wish with no limitations.
- Maintain your financial independence, with less stress and worry about paying bills.
You will still own the home, not the bank just as with traditional mortgages. Rick explains this in his Learning Center video: Title stays in the borrower’s name(s).
The Reverse Mortgage Process is Familiar.
The process of getting your reverse mortgage like getting any other home loan you’ve had.
- If you already have a mortgage, you’ll refinance it;
- if you don’t have a mortgage, you get a new loan, just as if you were buying a new home.
Rick will help you with the usual application and order the appraisal to determine the market value of your home. Income or debt requirements differ from traditional mortgages:
- Without mortgage payments, debt/income ratios don’t apply.
- Just show the income necessary to maintain your home and pay taxes and insurance.
How Much Money Can You Get?
How much money you can get depends three factors – watch Rick’s video for more detail:
- Appraised value of the home
- Age of the youngest borrower
- Interest rates
Qualification and Eligibility
- You must be 62 years or older, and
- Your home, or FHA-approved condo, must be your primary residence.
- You need to have at least 50% equity in your home, its value determined by an appraisal.
Almost any owner-occupied residence, including FHA-approved condos, as long as the owner occupies a unit. Mobile or manufactured homes not on a permanent foundation are not eligible.
When your loan closes:
You can access your money right away – tax-free – in any one or a combination of these three ways:
- Monthly payments wired into your account each month, or as a
- line of credit.
What Happens at the End of the Loan
The loan becomes due and payable when both borrowers or a borrower and surviving spouse no longer live in the home. Watch the video at right for details.
- If both have passed on, heirs will have 12 months to sell the house and pay off the mortgage or refinance it with a conventional mortgage to keep it.
- A surviving spouse is protected from having to vacate the home if the borrowing spouse passes on first or needs to live in assisted living.
Rick recommends involving your heirs in the process so they understand. Watch this video to learn more.
What Happens to the Loan Balance?
With a traditional mortgage, you borrow the bank’s money and pay it back with principal and interest. With a reverse mortgage refinance, the lending bank pays off your existing mortgage. You’ll owe them loan amount + interest for the period you have the loan. Because you are not making mortgage payments until you or your heirs sell the house (or refinance to keep it), interest accrues and the loan balance increases; but payment of it is deferred until the end of the loan.
FHA-insured reverse mortgage, MIP (Mortgage Insurance Premium) is required:
- This insurance protects the lender in the event the proceeds of the sale don’t cover the full balance; FHA insurance pays the lender the difference. That’s why lenders are willing to lend! They’ll always get what’s owed them.
- The benefit of MIP to the borrower is that it makes the loan a non-recourse loan: the home’s value is responsible for the debt, not you! Neither you nor your heirs will ever owe more than the loan balance, even if the sale doesn’t cover that balance.
Interest payments are tax-deductible only after the interest is paid. So, unless you make interim interest payments, the interest won’t be tax-deductible until the loan is paid off.