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Reverse Mortgage

A form of mortgage in which the lender makes periodic payments to the borrower, using the borrowers equity in the home as security. For older owners who have a lot of equity in their home, this can be used as income. The loan does not need to be repaid until the borrower sells the property or moves into a retirement community.

Reverse mortgages (also called home equity conversion loans) enable elderly homeowners to tap into their equity without selling their home. The lender pays you money based on the equity you've accrued in your home; you receive a lump sum, a monthly payment or a line of credit. Repayment is not necessary until the borrower sells the property, moves into a retirement community or passes away. When you sell your home or no longer use it as your primary residence, you or your estate must repay the cash you received from the reverse mortgage plus interest and other finance charges to the lender.

When you sell your home or no longer use it for your primary residence, you or your estate must repay the lender for the cash received from the reverse mortgage, plus interest and service fees. Any remaining equity belongs to you or your heirs. It's important to remember that you can never owe more than the home's appraised value when it is sold. None of your other assets will be affected by your reverse mortgage loan.

It is important that the borrowers family understand what is happening. The borrowers need to make them aware that there will be a balance to be paid when they pass away. The home is not owned free and clear any longer.

Reverse mortgages are a great way for an elderly person or couple to supplement income, especially if they are only getting social security as retirement income.

Any principal and interest accrued over the life of the loan is due and payable in one lump sum when the last borrower in the home is no longer the primary resident. In most cases, the amount that is due can be paid either by the selling of the home (where the difference of the selling price and remaining debt is left with the heirs), or refinancing the reverse debt with a traditional mortgage.

This is a great income supplement for those who need it.

A reverse mortgage is an agreement allowing a homeowner to borrow against home equity and receive tax-free payments until the total principal and interest reaches the credit limit of equity.

In reference to the HECM (most popular reverse mortgage), the fees associated with this loan are as follows: 1) Maximum of 2% origination fee based on the lesser of FHA's lending limit or the home's appraised value; 2) Closing costs such as title, escrow, appraisal, etc; 3) 2% charged by HUD on the lesser of lending limit or home value for initial mortgage insurance premium; 4) Monthly servicing fee of between $25 and $30 that is set aside initially and added to the loan balance as the loan progresses.

Loan to Value calculations, Credit requirements (FICO scores), and Debt to Income calculations are not used in determining how much a borrower can access in equity. For the HECM program, the amount that can be borrowed is based on the lesser of home value or lending limit, age of youngest borrower in the home, and an interest rate.

Reverse Mortgage Basics

Loan Features

There are many different types of reverse mortgages, but all share the same concepts. Listed below are the features that most have in common.


With a reverse mortgage you remain the owner of the home. As with any home the owner must still pay for the property taxes and homewners insurance. The homeowner is also responsible for making repairs to the property.

Financing Fees

The fees incurred on a reserves mortgage can be financed into the loan. The costs are added to the loan balance.

Loan Amounts

The amount of money a homeowner qualifies for can depend on the specific reverse mortgage plan or program selected. It also depends on the kind of cash advances the homeowner chooses.

With each program the amount of money a homeowner qualifies for generally depends on their age and the home value:

- The older the applicant is the more cash they can qualify for
- The more equity in the home the greater the amount of money the will qualify for

Debt Structure

Reverse mortgages generally are the primary loan on a home. Most reverse mortgage borrowers pay off any home debt with a lump sum advance from the reverse mortgage. The home owner may not have to pay off other debt against the 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.

Maximum Loan Amounts

The debt you incur on a reverse mortgage equals all the loan advances received. This would also include money used to finance the loan or to pay off prior debt and also all the interest that is added to the loan balance.

If the rising loan balance ever grows to equal the value of the home, the total debt is limited by the value of the home. You can never owe more than what a home is worth at the time the loan is repaid. The lender may not seek repayment from the homeowner's income, other assets, or their heirs.


All reverse mortgages are due and payable when the last surviving borrower dies or permanently moves out of the home. Reverse mortgage lenders can also require repayment if property taxes and homeowners insurance are not paid or the homeowner fails to keep the home in good repair. There are fairly standard conditions of default on any mortgage. On a reverse mortgage lenders generally have the option to pay for these expenses by reducing the loan advances and using the difference to pay these obligations.


After closing a reverse mortgage the homeowner had three days to cancel the mortgage.

To be eligible for a federally insured Home Equity Conversion Mortgage (HECM) or reverse mortgage, a homeowner must receive counseling from a HUD-approved counseling agency. Here are some of the counseling requirements.
1) All financing options must be provided to the homeowner.
2) The borrower must be presented with the financial implications of entering into a
home equity conversion mortgage.
3) A disclosure that a home equity conversion mortgage 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.

A Reverse Mortgage is a financial tool which provides seniors 62 years of age and older with funds from the equity in their homes. Generally speaking, no payments are made on a reverse mortgage until the borrower moves or the property is sold. The final repayment obligation is designed to not exceed the proceeds from the sale of the home.

There are currently 3 reverse mortgage programs available. The most popular reverse mortgage program is the FHA insured Home Equity Conversion Mortgage (HECM). The second program is the Fannie Mae Home Keeper, and the third is a jumbo reverse mortgage (cash account) offered by Financial Freedom. With the exception of the Home Keeper, the HECM and the Cash Account can be structured in different ways (i.e. interest rate adjustment for HECM, point variation on the Cash Account).

Possible income source for those who are on social security or limited fixed income.

A Reverse Mortgage borrower cannot be forced out of his/her home. Nor will he ever owe more than the value of his house. Reverse Mortgages are "non-recourse" loans, meaning in the rare case of drastic declines in home prices, the homeowner can never be held liable beyond the value of the subject home.

Reverse mortgages are currently being advertised on television as the next great thing in lending. Before you jump into such a loan program, be sure to educate yourself and know the full scope.

A reverse mortgage allows homeowners that are 62 and older to unlock a portion of the equity in their home without having to make a monthly repayment. The amount that they can unlock will be determined by a combination of three things: 1)Youngest borrower's age 2) Lesser of their home's value or a lending limit (HECM and FNMA) 3) An interest rate.

Fees and interest rates for reverse mortgages can vary significantly from lender to lender. Lenders are required to provide you with a Total Annual Loan Cost (TALC) document. You should compare several lenders to ensure that you are getting a good deal.

There are three basic types of reverse mortgage are: single-purpose reverse mortgages, which are offered by some state and local government agencies and nonprofit organizations; federally-insured reverse mortgages, which are known as Home Equity Conversion Mortgages (HECMs), and are backed by the U. S. Department of Housing and Urban Development (HUD); and proprietary reverse mortgages, which are private loans that are backed by the companies that develop them.

Reverse mortgage loan advances are not taxable, and generally do not affect Social Security or Medicare benefits. You retain the title to your home and do not have to make monthly repayments. The loan must be repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence. In the HECM program, a borrower can live in a nursing home or other medical facility for up to 12 months before the loan becomes due and payable.

You can get your money in a lump sum or monthly payments.

There are no credit requirments. Only that you need to 62 years of age or older and have sufficient equity.

You maintain complete ownership of your home.

If you are a senior at least 62 years old who is "house rich, but cash poor", a reverse mortgage may be a viable option to help get you the cash you need. Whether paid to you in lump sum or in installments, reverse mortgages require no payments from your side and are generally not taxable and generally don't impact social security or medicare benefits.

Because this loan must be the first lien on the home, any existing mortgage balance must be paid with the proceeds of the reverse mortgage. For instance, if the amount that can be borrowed from the reverse is $100,000 and the existing mortgage balance on the home is $50,000, the $50,000 will be paid with the amount available from the reverse ($100,000) and the remaining balance ($50,000) will be available to the homeowner.The homeowner can elect to convert the $50,000 into a monthly payment, place it in a line of credit, take any or all of the amount at closing, or any combination of the three.

The amount of cash that a borrower can receive is based on a formula of factors that include age of the youngest borrower, the interest rate, value of the home and the county where the home is located.

For more information regarding this topic, please call Mike Williams at 516-921-9000 or email