Reverse Mortgage Loans - What You Should Know Everyone has a unique borrowing situation.  To speak with a qualified reverse mortgage specialist, contact Nan Brown of Federated Lending at 1-800-355-9220 extension 104.  Nan will answer your questions and help you select the reverse mortgage program that best suits your individual needs.

A Fact Sheet on Reverse Mortgages                              Reverse Mortgage Calculator

Until recently, there were two main ways to get cash from your home:

• you could sell your home, but then you would have to move; or
• you could borrow against your home, but then you would have to make monthly loan repayments.

Now reverse mortgages give you a third way of getting money from your home. And you don't have to leave your home or make regular loan repayments.

A reverse mortgage is a loan against your home that you do not have to pay back for as long as you live there. It can be paid to you all at once, as a regular monthly advance, or at times and in amounts that you choose. You pay the money back plus interest when you die, sell your home, or permanently move out of your home.

Who's Eligible

All owners of the home must apply for the reverse mortgage and sign the loan papers. All borrowers must be at least 62 years of age for most reverse mortgages. Owners generally must occupy the home as a principal residence (where they live the majority of the year).

Single family one-unit dwellings are eligible properties for all reverse mortgages. Some programs also accept 2-4 unit owner-occupied dwellings, along with some condominiums, planned unit developments, and manufactured homes. Mobile homes and cooperatives are generally not eligible.

How They Work Reverse mortgage loans typically require no repayment for as long as you live in your home. But they must be repaid in full, including all interest and other charges, when the last living borrower dies, sells the home, or permanently moves away. Because you make no monthly payments, the amount you owe grows larger over time. As your debt grows larger, the amount of cash you would have left after selling and paying off the loan (your "equity") generally grows smaller. But you can never owe more than your home's value at the time the loan is repaid. Reverse mortgage borrowers continue to own their homes. So you are still responsible for property taxes, insurance, and repairs. If you fail to carry out these responsibilities, your loan could become due and payable in full.

What You Get

These loans can be paid to you all at once in a single lump sum of cash, as a regular monthly loan advance or as a creditline that lets you decide how much cash to use and when to use it. Or you may choose any combination of these payment plans.

Some reverse mortgages are offered by state and local governments. These "public sector" loans generally must be used for specific purposes, such as paying for home repairs or property taxes. Other reverse mortgages are offered by banks, mortgage companies, and savings associations. These "private sector" loans can be used for any purpose.

The amount of cash you can get from a private sector reverse mortgage generally depends on your age, your home's value and location, and the cost of the loan. The greatest cash amounts typically go to the oldest borrowers living in the most expensive homes on loans with the lowest costs.

The amount of cash you can get also depends on the specific reverse mortgage plan or program you select. The differences in available loan amounts can vary greatly from one plan to another. Most homeowners get the largest cash advances from the federally insured Home Equity Conversion Mortgage (HECM). HECM loans often provide much greater loan advances than other reverse mortgages.

What You Pay

The lowest cost reverse mortgages are offered by state and local governments. They generally have low or no loan fees, and the interest rates are typically low or moderate as well. Private sector reverse mortgages include a variety of costs. An application fee usually includes the cost of an appraisal and a credit report. Other loan costs typically include an origination fee, closing costs, insurance, and a monthly servicing fee. These costs generally can be paid with loan advances, which mean they are added to your loan balance (the amount you owe). Interest is charged on all loan advances.

Reverse mortgages are most expensive in the early years of the loan, and then become less costly over time. The cost can be very high in the short term, and is least costly if you live longer than your life expectancy. The federally insured Home Equity Conversion Mortgage (HECM) is almost always the least expensive private sector reverse mortgage.

Consumers considering a private sector reverse mortgage other than a HECM should carefully consider how much more it is likely to cost before applying. Other articles in The Basics section of this web site's Reverse Mortgages information provide more details on measuring and comparing the total cost of these loans.

Taxes, Estates, and Public Benefits

Reverse mortgages may have tax consequences, affect eligibility for assistance under Federal and State programs, and have an impact on the estate and heirs of the homeowner.

An American Bar Association guide states that generally "the IRS does not consider loan advances to be income." The guide explains that if you receive SSI, Medicaid, or other public benefits loan advances are counted as "liquid assets" if you keep them in an account past the end of the calendar month in which you receive them. If you do, you could lose your eligibility for these programs if your total liquid assets (for example, money you have in savings and checking accounts) are greater than these programs allow.

Basic Loan Features

Although there are different types of reverse mortgages, all of them are similar in certain ways. Here are the features that most have in common.

Homeownership

With a reverse mortgage, you remain the owner of your home just like when you had a forward mortgage. You are still responsible for paying your property taxes and home-owner insurance and for making property repairs.

When the loan is over, you or your heirs must repay all of your cash advances plus interest. Reputable lenders don't want your house; they want repayment.

Financing Fees

You can use the money you get from a reverse mortgage to pay the various fees that are charged on the loan. This is called "financing" the loan costs. The costs are added to your loan balance, and you pay them back plus interest when the loan is over.

Loan Amounts

The amount of money you can get depends most on the specific reverse mortgage plan or program you select. It also depends on the kind of cash advances you choose. Some reverse mortgages cost a lot more than others, and this reduces the amount of cash you can get from them.

Within each loan program, the amounts you can get generally depend on your age and your home's value:

• The older you are, the more cash you can get; and
• The more your home is worth, the more cash you can get.

The specific dollar amount available to you may also depend on interest rates and closing costs on home loans in your area.

Debt Payoff

Reverse mortgages generally must be "first" mortgages, that is, they must be the primary debt against your home. So if you now owe any money on your property, you generally must either :

• pay off the old debt before you get a reverse mortgage; or
• pay off the old debt with the money you get from a reverse mortgage.

Most reverse mortgage borrowers pay off any home debt with a lump sum advance from their reverse mortgage. You may not have to pay off other debt against your home if the prior lender agrees to be repaid after the reverse mortgage is repaid. Generally only state or local government lending agencies are willing to consider "subordinating" their loans in this way.

Debt Limit

The debt you owe on a reverse mortgage equals all the loan advances you receive (including any you used to finance the loan or to pay off prior debt), plus all the interest that is added to your loan balance. If that amount is less than your home is worth when you pay back the loan, then you (or your estate) keep whatever amount is left over.

But if your rising loan balance ever grows to equal the value of your home, then your total debt is limited by the value of your home. Put another way, you can never owe more than what your home is worth at the time the loan is repaid. The lender may not seek repayment from your income, your other assets, or from your heirs.

(The technical term for this cap on your debt is a "non-recourse limit." It means that the lender does not have legal recourse to anything other than your home's value when seeking repayment of the loan.)

Repayment

All reverse mortgages are due and payable when the last surviving borrower dies, sells the home, or permanently moves out of the home. (Typically, a "permanent move" means that neither you nor any other co-borrower has lived in your home for one continuous year.)

Reverse mortgage lenders can also require repayment at any time if you:

• fail to pay your property taxes;
• fail to maintain and repair your home; or
• fail to keep your home insured.

These are fairly standard "conditions of default" on any mortgage. On a reverse mortgage, however, lenders generally have the option to pay for these expenses by reducing your loan advances and using the difference to pay these obligations. This is only an option, however, if you have not already used up all your available loan funds.

Other default conditions on most home loans, including reverse mortgages, include:

• your declaration of bankruptcy;
• your donation or abandonment of your home;
• your perpetration of fraud or misrepresentation;
• if a government agency needs your property for public use (for example, to build a highway); or
• if a government agency condemns your property (for example, for health or safety reasons).

Changes that could affect the security of the loan for the lender can also make reverse mortgages payable. For example:

• renting out part or all of your home;
• adding a new owner to your home's title;
• changing your home's zoning classification; or
• taking out new debt against your home.

You must read the loan documents carefully to make certain you understand all the conditions that can cause your loan to become due.

Cancellation

After closing a reverse mortgage, you have three days to reconsider your decision. If for any reason you decide you do not want the loan, you can cancel it. But you must do this within three business days after closing. "Business days" include Saturdays, but not Sundays or legal public holidays.

If you decide to cancel, you must do it in writing, using the form provided by the lender, or by letter, fax, or telegram. It must be hand delivered, mailed, faxed, or filed with a telegraph company before midnight of the third business day. You cannot cancel by telephone or in person. It must be written.

A New Kind of Loan: In Reverse

A "reverse" mortgage is a loan against your home that you do not have to pay back for as long as you live there. With a reverse mortgage, you can turn the value of your home into cash without having to move or to repay the loan each month. The cash you get from a reverse mortgage can be paid to you in several ways:

• all at once, in a single lump sum of cash;
• as a regular monthly cash advance;
• as a "credit line" account that lets you decide when and how much of your available cash is paid to you; or
• as a combination of these payment methods.

No matter how this loan is paid out to you, you typically don't have to pay anything back until you die, sell your home, or permanently move out of your home. To be eligible for most reverse mortgages, you must own your home and be 62 years of age or older.

Other Home Loans

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 you don't need a minimum amount of income to qualify for a reverse mortgage. You could have no income and still be able to get a reverse mortgage.

With most home loans, you could lose your home if you don't make your monthly payments. But with a reverse mortgage, there aren't any monthly repayments to make. So you can't lose your home by not making them. Most reverse mortgages require no repayment for as long as you — or any co-owner(s) — live in the home. So they differ from other home loans in these important ways:

• you don't need an income to qualify for a reverse mortgage; and
• you don't have to make monthly repayments on a reverse mortgage.

"Forward" Mortgages

You can see how a reverse mortgage works by comparing it to a "forward" mortgage — the kind you use to buy a home. Both types of mortgages create debt against your home. And both affect how much equity or ownership value you have in your home. But they do so in opposite ways.

"Debt" is the amount of money you owe a lender. It includes cash advances made to you or for your benefit, plus interest. "Home equity" means the value of your home (what it would sell for) minus any debt against it. For example, if your home is worth $150,000 and you still owe $30,000 on your mortgage, your home equity is $120,000.

Falling Debt, Rising Equity

When you purchased your home, you probably made a small down payment and borrowed the rest of the money you needed to buy it. Then you paid back your traditional "forward" mortgage loan every month over many years. During that time:

• your debt decreased; and
• your home equity increased.

As you made each repayment, the amount you owed (your debt or "loan balance") grew smaller. But your ownership value (your "equity") grew larger. If you eventually made a final mortgage payment, you then owed nothing, and your home equity equaled the value of your home. In short, your forward mortgage was a "falling debt, rising equity" type of deal.

Rising Debt, Falling Equity

Reverse mortgages have a different purpose than forward mortgages do. With a forward mortgage, you use your income to repay debt, and this builds up equity in your home. But with a reverse mortgage, you are taking the equity out in cash. So with a reverse mortgage:

• your debt increases; and
• your home equity decreases.

It's just the opposite, or reverse, of a forward mortgage. With a reverse mortgage, the lender sends you cash, and you make no repayments. So the amount you owe (your debt) gets larger as you get more and more cash and more interest is added to your loan balance. As your debt grows, your equity shrinks, unless your home's value is growing at a high rate.

When a reverse mortgage becomes due and payable, you may owe a lot of money and your equity may be very small. If you have the loan for a long time, or if your home's value decreases, there may not be any equity left at the end of the loan.

In short, a reverse mortgage is a "rising debt, falling equity" type of deal. But that is exactly what informed reverse mortgage borrowers want: to "spend down" their home equity while they live in their homes, without having to make monthly loan repayments. There's more about this important concept in an article called "A 'Rising Debt' Loan" in the Basics section of this site.

Exception

Reverse mortgages don't always have rising debt and falling equity. If a home's value grows rapidly, your equity could increase over time. Or, if you only get one loan advance and no interest is charged on it, your debt would never change. So your equity would grow as your home's value increases. But most home values don't grow at consistently high rates, and interest is charged on most mortgages. So the majority of reverse mortgages end up being "rising debt, falling equity" loans.

Loan Types and Costs

The most well-known and widely available reverse mortgage is the federally-insured Home Equity Conversion Mortgage (HECM). This loan is backed by the U. S. Department of Housing and Urban Development (HUD) and can be used for any purpose. It is generally offered by mortgage companies or banks.

Some state and local governments offer low-cost reverse mortgages that generally must be used for one specific purpose only, for example, to make home repairs or pay property taxes. Many of these "public sector" loan programs are only available to homeowners with low or moderate incomes.

"Proprietary" reverse mortgages are owned and backed by the private companies that develop them. These loans can be used for any purpose and are generally the most expensive type of reverse mortgage.

Loan costs can vary by a lot from one type of reverse mortgage to another. Not all reverse mortgages include the same types of loan costs. As a result, the true, total cost of reverse mortgages can be difficult to understand and compare. That is why federal Truth-in-Lending law requires lenders to disclose a "Total Annual Loan Cost" for these loans.

Total Annual Loan Cost

The Total Annual Loan Costs (TALC) combines all of a reverse mortgage's costs into a single annual average rate. TALC disclosures can be useful when comparing one type of reverse mortgage to another. But they also show that the true, total cost of an individual reverse mortgage loan can vary by a lot and can end up being much more — or less — expensive than you might imagine.

TALC disclosures reveal that reverse mortgages generally cost the most when you live in your home only a few years after closing the loan. Short-term TALC rates are very high because the start-up costs are usually a very large part of the total amount that you owe in the early years of the loan. But as your loan balance grows larger over time, the start-up costs become a smaller part of your debt. As these costs are spread out over more and more years, the TALC rate declines.

If the loan's growing balance catches up to the home's value, your debt is then limited by that value. This makes the true cost of the loan decrease at a faster rate. So the longer you live in your home, or the less its value grows, the less expensive your loan is likely to be.

But TALC rates aren't the only way to measure reverse mortgage costs. An article on "Total Costs & Model Specifications" in the Basics section of this site shows a more complete way to measure and compare the costs and benefits of reverse mortgages.

Additional Resources

TALC Tutorial
URL: www.reverse.org/talctuto.htm
The National Center for Home Equity Conversion provides a step-by-step explanation of how TALC rates are calculated.