BILL CHERRY, REALTORS
DALLAS - HIGHLAND PARK
Our 45th Year Brokering Real Estate
214 503-8563
REVERSE MORTGAGE QUESTIONS AND ANSWERS
What is a reverse mortgage?
A reverse mortgage is an FHS-insured loan on the equity in your home, but you never have to pay it back as long as you live in your home.
Who qualifies?
Anyone who is at least 62-years of age who owns a home may qualify.
Does the home need to be paid off in advance?
No. Many people purchase a reverse mortgage to pay off their current mortgage so that they will no longer have to make monthly principal and interest payments.
How much money will I receive?
An licensed real estate appraiser will examine your home and determine its current market value. Most clients received between 40% and 80% of the appraised value of their home. The older the homeowner is, the higher percentage the homeowner will receive. There will be no federal income tax owed on the money the homeowner gets from the reverse mortgage.
How long does it take to receive the money?
Normally, it takes from four to ten weeks to complete the reverse mortgage from the time you apply.
Do I receive the money from the reverse mortgage in a lump sum or in monthly payments?
You can receive the money almost anyway you wish - in lump sum, monthly payments, partial limp sum with the rest to be paid monthly, or you can take out a line of credit and take out the money as you choose.
How would I pick the mortgage broker if I decide to investigate a reverse mortgage?
Since the reverse mortgage is run through the federal government, the interest rate is the same for everyone. And the fees collected by the bank for processing are relatively the same for everyone; consequently, you can pick a mortgage broker with whom you are comfortable having represent you.
How much money does the broker receive?
The current national standard is $2,000 or 2% of the home's value if it is appraised for over $100,000.
Do I pay this money to the mortgage broker?
You do not pay the mortgage broker directly, so you bring no money with you. This fee is paid by the bank out of your closing costs. So it is paid out of the equity in your home, not out of your pocket.
How long have reverse mortgage programs been in existence?
The first reverse mortgage occurred in 1961. However, reverse mortgages didn't become a government-run program until 1989. Texas was the last sate to permit them, with the first one being consummated in Texas in 2001.
Can I receive more money from an equity loan?
Possibly, if you qualify; however, you will have a monthly mortgage payment with this type of loan. Also, many senior citizens have fixed incomes that are not substantial enough to qualify for a large equity loan.
So let me summarize.
I received 40%-80% of my home's appraised value, less whatever is owed on my mortgage(s) at the time the home equity loan is made. I never pay any fees out of pocket. I can live in my home for the rest of my life. I make no house payments. I pay no income tax on the money I receive from the reverse mortgage. My children inherit my home.
There must be disadvantages. What are they?
Reverse mortgage fees can be high, although the fees are often rolled into the loan and not paid upfront. A reverse mortgage can cost thousands more than a conventional mortgage.
It is important to calculate the cost of a reverse mortgage against what you would net if you sold the house or refinanced it with a conventional loan. Remember, once you enter into a reverse mortgage agreement, the mortgage company essentially owns your home. Your heirs, however, have the right to buy it back from the mortgage company at a predetermined price.
So it's important for you to get sound advice if you decide to consider getting a reverse mortgage. Discuss your plans with legal and financial advisors and family members before making a decision. Because home ownership is often a person's most valuable asset, getting a reverse mortgage is essentially the same as spending an important part of your nest egg - and spending money you'd wanted to leave to your heirs.
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What is a line of credit?
A line of credit allows you to withdraw money from the bank whenever you wish, in whatever size denomination you wish, with a minimum withdrawal of $50. The money in this account grows like it would if it were in a savings account. When you pass away, whatever is left in the account is not required to be paid back; therefore, the line of credit allows you to tap into an account that constantly grows at the market rates, but only the money you withdraw will ever be charged as part of the reverse mortgage when you pass away.
Do I pay closing costs?
You pay nothing, at any time, out of your pocket. The closing costs are rolled into the loan so that they are paid out of your home's equity. It is important, however, before committing to a reverse mortgage, to have the mortgage broker prepare a preliminary closing statement which shows exactly what expenses will be charged you at closing.
How is the reverse mortgage paid back?
After you pass away, the home is left to your heirs. They can either sell the home, which will pay off the reverse mortgage and allow them to receive the excess - the remaining money from the proceeds of the sale.
Should they, on the other hand, want to live in the home themselves or rent it out, they can by simply taking out another mortgage to refinance the reverse mortgage, or they can pay off the reverse mortgage from their own cash.
Will and money be left in the home for my heirs when I pass away?
This depends on the value of the home at the time of your death. And it's one of the reasons a reverse mortgage only provides the borrower with 40% to 80% of the homes value at the time the reverse mortgage is taken out. Additionally, the interest rates on reverse mortgages are usually significantly lower than you could acquire if it were a regular home loan.
So does the equity grow in my home after I take out a reverse mortgage?
It can. Since the interest rate charged on the reverse mortgage is usually quite low, your home's equity could actually increase yearly in good markets. So should your home value increase say at as little as 4% per year, the equity in your home will double in sixteen years, even with the reverse mortgage in place. So your heirs may inherit a sizeable amount of money if they sell the home and the mortgage is paid off after you pass away.
So will that still apply if the interest rate becomes quite high?
Some economists feel that if the reverse mortgage interest rate increases dramatically, inflation should also increase. Therefore, you home's value should be increasing as well. So if this is true, your home's equity may continue to grow, no matter whether interest rates are low or high.
If my home loses value and is worth less than the reverse mortgage when I pass away, will my heirs have to pay the balance?
No. The FHA insurance paid out of closing costs insures that the home will never be worth less than is owed on it. So if your heirs chose to let the bank sell your home at the time of your death, your heirs will owe nothing on the mortgage of the proceeds of the sale bring in less than is owed.
If I pass away first, does my spouse have to sell the home?
No. As long as either of you are living in the home, the reverse mortgage terms remain in tact.
How does the bank make its money?
The bank makes its money on the interest, which gradually accumulates on the loan. Therefore, the bank has to wait until you pass away or no longer live in the house before the receive payment.
How can I be sure that the bank won't try to take away my home from me?
The reverse mortgage is a U.S. Government-run program, so it is insured by the Federal Housing Authority (FHA) to make sure that the mortgage never changes, and that neither you nor your heirs will ever get stuck paying a bill. Also, the longer you life in your home, the more money the bank will eventually make on the reverse mortgage, so they want you living there for many years.
Can I get a reverse mortgage on my rental property?
No. You can only get a reverse mortgage on your homestead.
Will I continue to be responsible for paying the homeowner's insurance and property taxes on my home?
This is important. Yes, you will be responsible for paying the homeowner's insurance and property taxes promptly when due, less you will be considered to be in default on your reverse mortgage.
Can I ever sell my home?
Yes, you can sell it at any time. You would simply sell your home for the market price so that hopefully you will be able to pay off your home equity loan. You will receive the remaining money.
My home needs repairs. Will I need to fix my home before I can get a reverse mortgage?
No, the appraiser will determine if any repairs will need to be made to your home. Cosmetic repairs are not of any concern to an appraiser. If major repairs are needed, you will simply have to provide the mortgage broker with an estimate of the cost of repairs, and the work can, in most cases, be done after you receive your reverse mortgage money.
How can I be sure I will receive a good appraisal for my home?
Independent appraisers are used. The loan broker will ask the appraiser for a realistic appraisal price, and if he doesn't feel he can get that price, ask your loan broker to request an appraisal from another appraiser. The goal is to get you the top dollar appraisal possible for your home.
Finally, we are providing this question and answer information about reverse mortgages so that our clients and friends can become educated as to how they work. However, in most cases, the FHA advises, Reverse Mortgages should only be considered as a last resort to raise spendable capital. We will be glad to help you to determine whether a reverse mortgage is a suitable solution for you.
Copyright 2009 - William S. Cherry
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