The loan balance and repayment
With a reverse mortgage, the unpaid loan balance grows over time. As a borrower, you can pay as much or as little toward the loan balance each month as you would like, or you can make no monthly mortgage payments at all. Of course, you still have to maintain the home and pay property taxes and homeowners insurance.
As long as you meet all of the terms of the loan, the loan balance only becomes due when the home is no longer your primary residence (e.g., you permanently move out or pass away).
The loan is typically satisfied through the sale of the home. If your heirs want to purchase the home, they can by paying 95% of the appraised value or paying off the loan balance, whichever is less. They can also choose to refinance the home into their name or simply walk away (in which case the home is usually sold on the open market).
You, or your heirs, keep the remaining proceeds (if any) after the loan is paid off. If the loan balance owed on your reverse mortgage exceeds the home value, neither you, your estate nor your heirs are responsible for paying back the deficit—thanks to the loan’s non-recourse feature.**
While a reverse mortgage may be more expensive than a traditional mortgage, it may also provide you with greater financial flexibility in retirement, as it can increase your cash flow and repayment can be deferred to a later date.
Almost all of the upfront costs—appraisal fee, third-party closing costs, initial mortgage insurance premium (MIP, which is calculated at 2.0% of your loan’s maximum claim amount), and a loan origination fee (has a regulated cap based on the home’s appraised value)—can be rolled into the reverse mortgage loan. One exception is the HECM counseling fee, which is around $125 and must be paid upfront and out of pocket.
There are also ongoing costs, which include annual MIP (0.5% of the outstanding loan balance) and loan servicing fees (Fairway doesn’t charge those), that are tacked on to the loan balance and will accrue interest.
Basic reverse mortgage qualifications.
- You (or at least one borrower) must be 62 or older. In Texas, both spouses need to be at least 62.
- Your property must be a single-family home, 2- to a 4-unit dwelling or FHA-approved condo
- You must meet minimal credit requirements
- You must receive reverse mortgage counseling from a HUD-approved counseling agency
- You must not be delinquent on any federal debt
- You must be a homeowner and either own home outright or have significant equity
- You must live in the house as the primary residence (meaning you must live there 6+ months per year)
Types of Reverse Mortgages.
In addition to the HECM reverse mortgage, Fairway offers other types of reverse mortgages to give you options when seeking to find the best complement to your retirement plan.
For example, if you own a high-value property, a jumbo reverse mortgage offers a much higher equity limit that you can borrow against versus a traditional HECM reverse mortgage (for which the current limit you would face is $1,089,300).
And, if you are looking to buy a new home, there’s a reverse mortgage loan specifically for that—it is called HECM for Purchase.
Way to use a reverse mortgage and benefits.
There are several instances in which a reverse mortgage may be the right options for you. Below are several different usages and benefits to reverse mortgages.
1. Use for lengthening or increasing retirement cash flow
Create memories that you will be glad to have at the sunset of life. It is sad when folks sit at home on top of thousands of dollars in equity and miss vacations, grandchildren’s college graduations, or even a dinner out because the budget is too tight. No well-meaning child would ever ask you to pinch pennies so they could have a more substantial home equity inheritance when you pass away. They would rather have you enjoy life with them.
2. Use to satisfy immediate cash needs
In any rough economic times, there are many things that you can take advantage of if you have cash. For example, you could help a grandchild save their home from foreclosure or help them with college as costs soar over $20,000 per year at public universities. Think about it—if you had an extra $100,000 in your hand today, whom could you give it to, or what else could you do with it? With your wisdom and experience, we know you can think of lots of options.
3. Use to enhance legacy for charity or the next generation*
If you work with a professional financial advisor in the life insurance industry, you may find there are many products designed for those with excess cash, including some that may accomplish more than a paid-off house could by itself. Talk to your financial advisor about products that may be available to you and your specific situation.
4. Use to avoid draining other investments*
Using the loan proceeds from a reverse mortgage loan can potentially help all of your investments last longer. Talk to your financial advisor about how to incorporate this loan into your overall financial plan.