What Is a Reverse Mortgage & What Does It Mean to Me?

A reverse mortgage is an increasingly attractive proposition for older Americans who want to supplement retirement income, pay off bills, and want to live a more comfortable retirement by having a nest egg or emergency fund.

What Is a Reverse Mortgage?

They give homeowners an opportunity in a time where millions of seniors are struggling to save enough money for retirement. Data shows that 56% of seniors believe they will outlive their retirement savings, and 16% have saved zero dollars for retirement.

Today’s reverse mortgages are supervised by the U.S. Federal Housing Administration, an arm of the Department of Housing and Urban Development, so there is a level of regulatory scrutiny.

A closer look at reverse mortgages may provide some answers for seniors approaching their golden years but lack adequate retirement savings.

How Do Reverse Mortgages Work?

Reverse mortgages are geared toward older homeowners who have accumulated a healthy chunk of home equity on their properties and wish to leverage that value into retirement income. A reverse mortgage is the exact opposite of traditional mortgages, where mortgage payments are paid monthly basis until the mortgage loan is fully repaid.

Although that homeowner still must pay property taxes and insurance on the home, unlike a regular, traditional mortgage, reverse mortgage holders receive the money from a lender, but never have to repay the money until he or she leaves the home or dies.

Note that, reverse mortgages are not the same as bank-sponsored home equity loans or home equity lines of credit. With a home equity loan, the borrower pays down the loan monthly, at a fixed sum, until the loan is repaid.

Things to Know About Reverse Mortgages

Eligibility Factors 

By and large, it's easy to qualify for a reverse mortgage. You can do so if you clear the following hurdles:

• You are 62 years of age or older. But your spouse can be younger.
• You own your home and live on the premises.
• You have sufficient income to pay for your taxes, insurance, and maintenance. If needed, the lender will use the money you receive as income so almost everyone can qualify.
• You either have paid off your mortgage loan outright and own your own home, or the first portion of the money you receive pays off any mortgages.

The government requires that any reverse mortgage borrower must first have a phone interview with a government-approved financial specialist to ensure the reverse mortgage is a good fit, and that the borrower isn't taking on undue risk.

Borrowers should take these sessions as a valuable learning tool and use them to weigh the risks and opportunities of taking out a reverse mortgage.

Borrowing Limits 

Your loan amount varies with a reverse mortgage. The formula lenders use is based on the borrower's age, and the value of the home.

Age may be the biggest factor when mulling how much to borrow on a reverse mortgage. Basically, the older a homeowner is, the more he or she can borrow from a reverse mortgage lender (that's because the older reverse mortgage consumer at, for example, age 82, is more likely to pass on or sell the home relative to a reverse mortgage consumer who is, say, 62 years of age.

Additionally, the more your home is worth, and the more equity you have in the home, the more you can borrow from a reverse mortgage lender. That's due to the scale lenders use when issuing reverse mortgage loans.

What are the costs?

The closing costs are the same as a traditional closing cost but are higher because your loan is based on the appraised value of your home, not the loan amount like a traditional mortgage.

There is an initial and monthly mortgage insurance premium paid to the Federal Housing Administration. The fee is paid to the FHA for a good reason— it's an insurance policy of its own for the backup Uncle Sam gives to reverse mortgage loan borrowers.

All costs except the appraisal, and FHA counseling fee (125.00) are paid from the proceeds you receive.

The Biggest Myths

The first is that “the bank owns my home”. NOT TRUE. You still own your home the way you do now. The bank just has a lien on it the same as if you had a traditional mortgage. You can do whatever you want as long as you continue to pay your taxes and insurance, even paint it pink 

The other is “I heard that the bank wants your home and will foreclose on you” NOT TRUE! The only time a lender will foreclose is if you don’t pay your taxes and insurance after months of warnings. The same thing happens with a traditional mortgage. The last thing any lender wants to do is foreclose on a home and must take over the expenses and time and trouble to sell it. Lenders are in business to lend money, not sell homes.

Is a Reverse Mortgage Right for You?

A reverse mortgage is a unique financial instrument meant for specific consumers. Studies show that seniors who have reverse mortgages generally approve of the experience, and most reverse mortgage consumers say they received the amount of money they expected to receive, and that the money lasts either as long as expected or even longer. Many say that they are now happier and sleep better at night