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Reverse Mortgage

reverse mortgage features

What is a Reverse Mortgage

A reverse mortgage is loan available to homeowners who are 62 years or older that enables them to convert part of the equity in their home into cash.

The product was conceived as a means to help retirees with limited income use the accumulated wealth in their homes to cover basic monthly living expenses and pay for health care. However, there is no restriction for how reverse mortgage proceeds can be used.

The loan is called a reverse mortgage because the traditional mortgage payback stream is reversed. Instead of making monthly payments to a lender, as with a traditional mortgage, the lender makes payments to the borrower.

You are not required to pay back the loan until the home is sold or otherwise vacated. As long as you live in the home, you are not required to make any monthly payments towards the loan balance, but you must remain current on your property taxes, homeowners insurance and condominium fees (if you live in a condo).

Borrower Requirements and Responsibilities

Age qualification: All borrowers listed on title must be 62 years old.

Primary lien: A reverse mortgage must be the primary lien on the home. Any existing mortgage must be paid off using the proceeds from the reverse mortgage. (Reverse mortgage proceeds can be used,)

Occupancy requirements: The property used as collateral for the reverse mortgage must be the primary residence. Vacation homes and investor properties do not qualify.

Taxes and Insurance: You must remain current on your real estate taxes, homeowners insurance, and other mandatory obligations, including condominium fees, or you are susceptible to default.

Property Condition: You are responsible for completing mandatory repairs and maintaining the condition of the property.

Conveyance of the mortgaged property by will or operation of law to the estate or heir after mortgagor's death: When a reverse mortgage becomes due and payable as a result of the borrower's death and the property is conveyed by will or operation of law to the estate or heirs (including a surviving spouse who is not on title and therefore not obligated on the HECM note) that party (or parties if multiple heirs) may satisfy the HECM debt by paying the lesser of the mortgage balance or 95% of the current appraised value of the property.

Features of Reverse Mortgages

With a reverse mortgage, you always retain title or ownership of the home. The lender never, at any point, owns the home even after the last surviving spouse permanently vacates the property.

The amount of funds that a person is eligible for depends on his age (or, in the case of couples the age of the younger spouse), the value of the home, the interest rate and upfront costs. The older you are, the more proceeds you may receive.

There is a limit on the amount of funds you can access during the initial year. If you are eligible for a $100,000 loan, for example, you can take $60,000, or 60 percent of that sum. There are exceptions. You can withdraw a bit more if you have an existing mortgage, or other liens on the property, that exceed the 60 percent limit. You must pay off these "mandatory obligations" as the government calls them, before qualifying for the reverse mortgage. You can withdraw enough to pay off these obligations, plus another 10 percent of the maximum allowable amount -- in which case that's an extra $10,000, or 10 percent of $100,000.

Loan proceeds can be taken as a lump sum, as a line of credit or as fixed monthly payments, either for a fixed amount of time or for as long as you remain in the home. You can also combine these options, for example, taking part of the proceeds as a lump sum and leaving the balance in a line of credit.

Fees can be paid out of the loan proceeds. This means you incur very little out-of-pocket expense to get a reverse mortgage. Your only out-of-pocket expense is the appraisal fee and maybe a charge for counseling depending on the counseling organization you work with. Together, these two fees will total a few hundred dollars. Very low-income homeowners are exempted from being charged for counseling.

When you ultimately pay off the loan, the final balance equals the amount of funds borrowed, plus annual mortgage insurance premiums, servicing fees and interest. The loan balance grows as you live in the home. In other words, when you sell or leave the house, you owe more than you originally borrowed. Look at it this way: A traditional mortgage is a balloon full of air that loses some air and gets smaller each time you make a payment. A reverse mortgage is an empty balloon that grows larger as time passes.

With a Home Equity Conversion Mortgage or HECM (see Types of Reverse Mortgages), no matter how large the loan balance, you never have to pay more than the appraised value of the home or the sale price. This feature is referred to as non-recourse. If the loan balance exceeds the appraised value of the home, then the federal government absorbs that loss. The government pays for it with proceeds from its insurance fund, which you as a borrower pay into on a monthly basis.

You are responsible for paying property taxes, homeowners insurance, condo fees and other financial charges. Any lapse in these policies can trigger a default on your loan. To help reduce future defaults, HUD will soon require lenders to conduct a financial assessment of all prospective borrowers.

Lenders will analyze all income sources -- including pensions, Social Security, IRAs and 401(k) plans -- as well as your credit history. They will look closely at how much money is left over after paying typical living expenses. If a lender determines that you have sufficient income left over, then you won't have to worry about having any funds set-aside to pay for future tax and insurance payments. If, however, a lender determines that you may not be able to keep up with property taxes and insurance payments, they will be authorized to set-aside a certain amount of funds from your loan to pay future charges.

Types of Reverse Mortgages

What is a HECM

HECM is the commonly used acronym for a Home Equity Conversion Mortgage, a reverse mortgage created by and regulated by the U.S. Department of Housing and Urban Development.

A HECM is not a government loan. It is a loan issued by a private bank, but insured by the Federal Housing Administration, which is part of HUD. Each year the borrower is charged an insurance fee of 1.25% of the loan balance. Your loan balance thus increases by the amount of this fee. The insurance purchased by this fee protects the borrower (1) if and when the lender is not able to make a payment; and (2) if the value of the home upon selling is not enough to cover the loan balance. In the latter case, the government insurance fund pays off the remaining balance.

Currently, HECMs make up most reverse mortgages offered in America. HECMs come with rules and regulations that include a requirement that the borrower receive third-party counseling.

HECM Options

Single Product Option

Closing costs and interest rates may vary from lender to lender, but when shopping around for a reverse mortgage, you may find the product options are limited. That's because there is but one product option and it works like this. The amount of loan proceeds you can access during the first 12 months after closing is limited to 60 percent of the loan amount. For example, if you are eligible for a $100,000 reverse mortgage, you may only access $60,000. After the initial year has expired, you may access as much or as little of the remaining loan proceeds as you wish.

There are exceptions. You can withdraw a bit more if you have an existing mortgage, or other liens on the property, that exceeds the 60 percent limit. You must pay off these "mandatory obligations" as the government calls them, before qualifying for the reverse mortgage. You can withdraw enough to pay off these obligations, plus another 10 percent of the maximum allowable amount -- in which case that's an extra $10,000, or 10 percent of $100,000.

Single Payment Disbursement Option

Historically, HECM borrowers had to take all of the loan proceeds available to them.

You have the option to do a HECM “mini” that allows you to take less money at closing. If you are eligible for a $100,000 loan, for example, but don't want that much money, you can choose a single disbursement equal to 60 percent or less of that sum.

Unfortunately, if you wanted more money at a later time, you would not be able to access any additional funds. However, this is a great option for someone who wants to preserve the equity in the home by utilizing a smaller amount of funds.

For Purchase

While the typical retiree uses a HECM to eliminate debts, pay for healthcare and/or cover daily living expenses, a growing segment of the senior population is using it to purchase a home that better suits their needs.

The advantage of using HECM for Purchase is that the new home is purchased outright, using funds from the sale of the old home, private savings, gift money and other sources of income, which are then combined with the reverse mortgage proceeds. This home buying process leaves you with no monthly mortgage payments.

While study after study reveals that an overwhelming percentage of seniors want to continue living in their current home for as long as possible, for some people that isn’t the best, or safest, option. HECM for Purchase offers a solution to downsize into a place that’s more easily navigable, possibly more energy efficient, with lower maintenance costs, or which is closer to friends and family.

Proprietary Reverse Mortgage

Right now, very few proprietary reverse mortgages exist. However, it’s important to mention them, because market conditions may change in the foreseeable future when property values stabilize.

Proprietary reverse mortgages are privately insured by the banks and mortgage companies that offer them. They are not subject to all the same regulations as HECMs, but as a standard best practice, most companies that offer proprietary reverse mortgages emulate the same consumer protections that are found in the HECM program, including mandatory counseling.

children benefit programsAdvice for Children of Seniors

Should My Mom and Dad Get a Reverse Mortgage?

You are referred to as the “Sandwich Generation.” You’ve got kids in or heading for college as well as retired parents. Wherever you look, all you can see is additional expenses.

In the rough economy of the past few years--with home values and retirement savings down, government benefit programs threatened and people living longer--many children of seniors are concerned about their parents being able to finance the remainder of their lives, even if they have been diligent about retirement planning.


The vast majority of America’s seniors have their wealth in their home equity. And if your parents are struggling to meet their month-to-month expenses or paying for health expenses, tapping into that equity may be the best solution. A reverse mortgages is a financial product that allows them to do just that.

Whether or not a reverse mortgage is the right financial option for your parents is a very personal decision and based on many factors. In most cases, your parents will discuss this option with you before making their decision. You want to be prepared to give them the best advice. Here are some questions you most likely will want answered:

What is a reverse mortgage?

A reverse mortgage is a loan available to homeowners over 62 years of age that enables them to convert part of the equity in their home into cash.

The loan is called a reverse mortgage because the traditional mortgage payback stream is reversed. Instead of making monthly payments to a lender (as with a traditional mortgage), the lender makes payments to the borrower.

What do people use reverse mortgages for?

Reverse mortgages were conceived as a means to help people in or near retirement who have limited income use the money they have put into their home to pay off debts (including traditional mortgages), cover basic monthly living expenses or pay for health care. There is no restriction on how a borrower may use their reverse mortgage proceeds.

Will a reverse mortgage increase my parents’ monthly expenses?

No. Borrowers are not required to pay back the loan until the home is sold or otherwise vacated. As long as they live in the home, they are not required to make any monthly payments towards the loan balance, but they must remain current on tax and insurance payments.

If my parents take a reverse mortgage, does the bank then own their home?

No. With a reverse mortgage, the borrower always retains title to or ownership of the home. The lender never, at any point, owns the home even after the last surviving spouse permanently vacates the property.

How much money can my parents expect?

The amount of funds they are eligible for depends on the age of the youngest parent, the value of the home, the interest rate and upfront costs. The older a person is, the more proceeds he or she can receive.

Funds can be delivered as a lump sum, as a line of credit or as fixed monthly payments, either for a specified period of time or for as long as your parents live in the home. They can also use more than one of these options, for example, take part of the proceeds as a lump sum and leave the balance in a line of credit.

How much will the loan cost my parents?

Loan fees can be paid out of the loan proceeds. This means a borrower incurs very little out-of-pocket expense to get a reverse mortgage. The only out-of-pocket expenses are the appraisal and possibly the counseling session (depending on which counseling agency you work with), which together total a few hundred dollars.

When the loan is eventually paid off, the balance equals the amount borrowed, plus interest and mortgage insurance. The loan balance grows as the borrower continues to live in the home. In other words, when the borrower sells or leaves the house, he or she will owe more than originally borrowed. Look at it this way: A traditional mortgage is a balloon full of air that loses some air and gets smaller each time a payment is made.. A reverse mortgage is an empty balloon that grows larger as time passes.

If when my parents move or die and the balance is more than the value of the home, am I then responsible?

No matter how large the loan balance, your parents (or their heirs) will never have to pay more than the appraised value of the home or the sale price. This feature is referred to as non-recourse. If the loan balance exceeds the appraised value of the home, then the federal government absorbs that loss. The government pays for it with proceeds from its insurance fund, which the borrower pays into on a monthly basis.

If my parents get a reverse mortgage, what are their responsibilities?

financial consultant servicesPrimary lien: A reverse mortgage must be the primary lien on a home. Any prior mortgage must be paid in full to acquire the reverse mortgage. (Reverse mortgage proceeds can be used for this purpose,)

Occupancy requirements: The property used as collateral for the reverse mortgage must be your parents' primary residence.

Taxes and Insurance: Your parents are required to remain current on their real estate taxes, home insurance, and, if applicable, condo fees or they are susceptible to default.

Property Condition: Your parents are responsible for completing mandatory repairs and maintaining the condition of their property.

Rights of Non-Borrower Residents at Time of Loan Termination: If there is a non-borrower resident (living in the home but not on title), it’s important that you understand what happens when the owner on title permanently vacates the property, either by death or move out, and the loan becomes due and payable. Either arrangement needs to be made ahead of time to pay back the loan when it becomes due, or the property will have to be vacated.

But my parents want to downsize. How can a reverse mortgage help them?

While the typical retiree uses a reverse mortgage to eliminate debts, pay for healthcare and/or cover daily living expenses, a growing segment of the senior population is using it to purchase a home that better suits their needs.

The advantage of using what is known as a HECM for Purchase is that the new home is purchased outright, using funds from the sale of the old home, private savings, gift money and other sources of income, which are then combined with the reverse mortgage proceeds. This home buying process leaves the homeowner with no monthly mortgage payments.

Calculate How Much Money You Can Get

The amount of proceeds you receive is based on the appraised current value of your home, your age and current interest rates.

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Wright Financial
1108 N. Truman Blvd., Crystal City, MO 63019
636-931-2121

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Contact Information

Wright Financial Inc.

1108 N. Truman Blvd. 
Crystal City, MO 63019

Phone: 636-931-2121
Fax: 636-232-2069

Business Hours:
Monday-Friday: 9 a.m.-5 p.m.
By Appointment

NMLS # 1215682

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