Reverse mortgage guidance
You may have seen ads on TV featuring well-known celebrities touting the benefits of reverse mortgages. The DC Department of Insurance, Securities and Banking (DISB) wants consumers to better understand reverse mortgages. Reverse mortgages are popular mortgage loan products that may give you access to the equity in your home, but are complicated and have several requirements. It is important to understand how a reverse mortgage can affect your financial situation, your home equity, and the ability of your heirs to keep your home in the family.
What is a reverse mortgage?
A reverse mortgage is a loan product that allows a borrower to use the equity in their home as a guarantee for a loan. Borrowers typically use a reverse mortgage to help pay for a variety of living expenses. A reverse mortgage differs from a traditional mortgage in that the borrower does not make monthly loan payments; instead, the lender disburses payments to the borrower. The interest rate for a reverse mortgage can be adjustable or fixed. Additionally, there are closing costs and fees associated with reverse mortgages.
The primary borrower for a reverse mortgage must be at least 62 years old with the home as their primary residence, and most or all of a traditional mortgage must be paid off. A borrower with a reverse mortgage must continue to pay property taxes, maintain homeowner’s insurance for the property, and keep the house in good condition.
The most common reverse mortgage loan product is the Home Equity Conversion Mortgage (HECM) loan. The HECM is originated by mortgage companies and insured by the U.S. Department of Housing and Urban Development (HUD). HECM lenders must follow additional rules set by HUD, including mandatory housing counseling. Non-HECM reverse mortgages may have different requirements and features.
Important Fact: Since interest and fees are added to the loan balance of reverse mortgages each month, the loan balance goes up, not down, over time. As the loan balance increases, the equity in the home decreases.
What happens when I pass away?
A reverse mortgage loan balance becomes due upon the death of the last surviving borrower. If all borrowers (or an eligible non-borrowing spouse) are deceased and the heirs wish to keep the home, the heirs must pay the loan balance in full. If the borrowers’ heirs do not wish to keep the home, they may sell the property to pay off the balance. If the borrowers’ heirs do nothing, the lender may foreclose. Typically, heirs will repay the loan by selling the home.
- How does it work when the loan balance is less than the home value?
Your heirs may use the loan proceeds to repay the loan and keep the difference. - How does it work when the loan balance is more than the home value?
Your heirs will not have to pay more than 95 percent of the appraised value. The remaining balance of the loan is covered by mortgage insurance.
Important Note: If you plan to leave your home to heirs, talk to them about the repayment options. If your heirs want to keep the home, they will have to repay either the full loan balance or 95 percent of the home’s appraised value—whichever is less.
What happens if I move away from my home?
The home must continue to be the primary residence of the borrower for a reverse mortgage to remain in good standing. A borrower can only get a reverse mortgage on the home where they spend most of the year. If a borrower has a medical issue or similar situation that forces the borrower to move out of the home for a period of longer than 12 months, the reverse mortgage becomes due.
Annually, lenders (or loan servicers) ask the borrower to certify that the home continues to be the borrower’s primary residence.
If a borrower wishes to move away from the home, the borrower may sell the home to pay off the reverse mortgage. If a borrower moves out and does not take further action, the lender may foreclose on the home.
How much does a reverse mortgage cost?
A reverse mortgage can be an expensive financing option when you consider the upfront costs along with the ongoing costs.
- Upfront Costs
Borrowers typically pay one-time, upfront costs at the beginning of the reverse mortgage. A borrower can choose to pay these costs out-of-pocket, but the upfront costs are typically paid from the loan proceeds at closing. The borrower will not have to bring money to the closing, but the total amount of money to the borrower will be reduced.
Upfront costs include origination fees paid to the lender, real estate closing costs paid to third-party professionals, and the initial mortgage insurance premium paid to the FHA.
- Ongoing Costs
Ongoing costs are added to the loan balance each month. These costs compound, meaning each month the borrower is charged interest and fees on the interest and fees that were added to the previous month’s loan balance.
Ongoing costs include interest, mortgage insurance premiums (MIP) and servicing fees. It is important to note that these costs are charged each month. Interest and the MIP are calculated as a percentage of your outstanding loan balance.
What about reverse mortgage scams?
A reverse mortgage may be a helpful way to provide additional financial support as borrowers get older. However, it is important to know that scammers use reverse mortgages to con older Americans out of their hard-earned money and equity and, in some cases, their homes. Some tips to avoid becoming a victim of a reverse mortgage scam:
- Do not reply to unsolicited reverse mortgage offers by phone or by email.
- Never give out confidential personal information such as social security numbers or banking information over the phone or by email.
- Do not sign anything you do not understand.
- Contact our office or a HUD-approved counselor if you are not sure an offer is legitimate.
Who is a reverse mortgage right for?
Here are a few rules of thumb to consider when considering a reverse mortgage.
A reverse mortgage may be a good idea if:
- You and your spouse/partner are both 62 or older.
- You are in a strong financial position.
- You are able to physically maintain your home.
- You have considered the needs of your heirs.
- Your home value is increasing due to changes in the real estate market.
A reverse mortgage may not be a good idea if:
- Your home has sentimental value and you and your family would like it to stay in the family when you die.
- Your health is unpredictable and you may not be able to stay in your home.
- You live with others who would not be able to easily move if you no longer live in the home.
- Your home value is decreasing due to changes in the real estate market.
- You are being pressured by someone, (family, friends, lender) to get one.
For more information
If you are interested in considering a reverse mortgage and you have not spoken with a counselor yet, please call (800) 569-4287 to find a HUD-approved reverse mortgage counselor. A detailed discussion with a counselor will give you important information to help you determine if a reverse mortgage is right for you.
If you have questions after speaking with a HUD-approved reverse mortgage counselor, please contact DISB at (202) 727-8000.