Reverse Mortgage Wiki: Understanding the Basics and Options

A reverse mortgage can be a complex and intimidating concept, but understanding the basics can help you make an informed decision. There are two main types of reverse mortgages: Home Equity Conversion Mortgages (HECMs) and proprietary reverse mortgages.

HECMs are insured by the Federal Housing Administration (FHA) and are the most common type of reverse mortgage. They allow homeowners to borrow money using the equity in their home, with no monthly mortgage payments required.

The amount of money you can borrow with an HECM is based on your home's value, your age, and current interest rates. For example, if your home is worth $200,000 and you're 62 years old, you may be eligible for a loan of up to $100,000.

Proprietary reverse mortgages, on the other hand, are offered by private companies and may have different eligibility requirements and terms. They often require a higher credit score and a lower loan-to-value ratio than HECMs.

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In Australia, reverse mortgages are regulated by the Australian Securities and Investments Commission (ASIC), requiring high compliance and disclosure from lenders and advisers to all borrowers.

To qualify for a reverse mortgage in Australia, you must be over a certain age, usually 60 or 65, and own the property or have a low enough existing mortgage balance that it will be extinguished by the reverse mortgage proceeds.

The borrower remains entirely responsible for the property, including physical maintenance, and some programs require periodic reassessments of the property's value.

You'll need to seek credit advice from an accredited reverse mortgage specialist before applying, as eligibility requirements vary by lender.

Here are the key eligibility requirements:

To qualify for a reverse mortgage, you must meet certain eligibility requirements. The borrower must be over a certain age, usually 60 or 65, and if the mortgage has more than one borrower, the youngest borrower must meet the age requirement.

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In Australia, the borrower must own the property or have an existing mortgage balance that will be extinguished by the reverse mortgage proceeds. This means the reverse mortgage will be the only debt remaining secured against the property.

Some programs require periodic reassessments of the property's value to ensure the loan amount remains stable. You'll need to consider the ongoing responsibility for property maintenance, as the borrower is entirely responsible for the property.

Here are the key eligibility requirements for a reverse mortgage:

You have a three-day window to cancel a reverse mortgage, which is known as your right of rescission. This means you can cancel the deal for any reason without penalty within three business days after the loan is closed.

To cancel, you'll need to notify the lender in writing. Send your letter by certified mail to ensure it's documented.

To get a HECM loan, you'll want to consider the loan size and cost. The exact amount of money available is determined by factors such as your age, current interest rates, property value, and property location.

The loan size can be as high as 50% of the property's value, and the amount is influenced by your age, with more available at an older age. For example, if you're 70, you might be eligible for a larger loan than if you're 60.

The cost of getting a HECM loan includes an application fee, which can be between $0 and $950, and government charges such as stamp duty and mortgage registration fees, which vary by location.

You'll also need to consider the interest rate, which can be variable or fixed, although new loans are no longer allowed to have fixed rates. Some programs may also have a monthly service charge, which compounds with the principal.

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Here are some possible loan sizes and costs to consider:

Keep in mind that the best products have no monthly fees, so it's worth shopping around to find a good deal.

Home Equity Conversion Mortgages account for 90% of all reverse mortgages originated in the U.S. and as of May 2010, there were 493,815 active HECM loans.

The maximum percentage of home equity that can be tapped with a reverse mortgage depends primarily on the age of the homeowner(s) and can reach up to 55% or even 59% at one provider.

Here's a breakdown of the maximum percentages as a function of age:

The loan can be set up as a lump sum, a series of payments, or both, and those payments are tax-free and do not affect Old Age Security (OAS) or the Guaranteed Income Supplement (GIS), if applicable.

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The proceeds from a reverse mortgage can be distributed in several ways, including as a lump sum, a Tenure payment, a line of credit, or a combination of these. This flexibility allows borrowers to choose how they want to receive their funds.

The total pool of money that a borrower can receive from a HECM reverse mortgage is called the principal limit (PL), which is calculated based on the maximum claim amount (MCA), the age of the youngest borrower, the expected interest rate (EIR), and a table to PL factors published by HUD.

Most PLs are typically in the range of 50% to 60% of the MCA, but they can sometimes be higher or lower. For example, if a borrower is 80 years old, they can potentially tap up to 58% of their home's value.

The amount of proceeds available from a reverse mortgage can vary significantly based on the borrower's age. As shown in the table below, the principal limit can reach up to 59% at one provider, and even higher at other providers.

The loan size and cost of a reverse mortgage in Australia can be substantial. The loan size can be as high as 50% of the property's value.

The amount of money available is determined by several factors, including the borrower's age, current interest rates, property value, and property location.

The borrower's age is a significant factor, with a higher amount available at a higher age. The exact age threshold isn't specified, but it's clear that age plays a role.

Current interest rates also impact the loan size, as higher rates can limit the amount available. This is a key consideration for borrowers.

The property value is another crucial factor, with the loan size tied to the property's worth. This means that the loan size can fluctuate if the property value changes.

Program minimum and maximum loan sizes also apply, with some lenders setting a minimum of $10,000 and a maximum of between $250,000 and $1,000,000.

The cost of a reverse mortgage can be significant, with an application fee ranging from $0 to $950. This fee is typically rolled into the loan itself and compounds with the principal.

Government charges such as stamp duty, mortgage registration fees, and other expenses also apply, but vary by location.

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The interest rate on a reverse mortgage can be either fixed or variable, although fixed rates are no longer offered under the current National Consumer Credit Protection Act.

A monthly service charge may also be applied to the balance of the loan, compounding with the principal. This charge can range from $12 per month, but some products have no monthly fees.

Here's a breakdown of the typical costs associated with a reverse mortgage:

You can access HECM funds in several ways, including a lump sum in cash at settlement.

The money from a reverse mortgage can be distributed in four ways, based on your financial needs and goals: lump sum in cash at settlement, monthly payment, line of credit, or a combination of these.

A line of credit is a popular option, similar to a home equity line of credit, which allows you to access funds as needed.

The line of credit option accrues growth, meaning that whatever is available and unused will automatically grow larger at a compounding rate.

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The line of credit growth rate is determined by adding 1.25% to the initial interest rate.

The adjustable-rate HECM offers all of the above payment options, including line of credit, but the fixed-rate HECM only offers lump sum.

Here are the four ways to distribute HECM proceeds:

If you opt for a HECM line of credit, you can potentially gain access to more cash over time than what you initially qualified for at origination.

However, if the total mandatory obligations exceed 60% of the principal limit, you can only draw an additional 10% of the principal limit if available.

Taxes and insurance can be a bit complex when it comes to reverse mortgages. Here are some key points to keep in mind.

Income from a reverse mortgage set up as an annuity or line of credit typically won't affect government income support entitlements. However, income from a lump sum reverse mortgage may be considered a financial investment and could impact your eligibility.

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The cost of getting a reverse mortgage from a private sector lender may be higher than other types of mortgage or equity conversion loans. These costs can vary depending on the lender and the specific program you choose.

Money received from a reverse mortgage is not taxable income, so it won't affect your Old Age Security or Guaranteed Income Supplement benefits.

Getting a reverse mortgage can come with some upfront costs, which can be a bit of a shock. The application fee, also known as the establishment fee, can range from $0 to $950.

One of the most significant costs associated with a reverse mortgage is the home appraisal fee, which can range from $300 to $600. This fee is usually charged to determine the value of your property.

In addition to the home appraisal fee, you'll also need to pay set-up fees and closing costs, which can be more than $1000. These fees can vary depending on the lender and the specifics of your loan.

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Legal fees can also be a significant cost, ranging from $500 to $1000. It's essential to factor these costs into your decision-making process.

Some reverse mortgage programs may also charge a monthly service charge, which can range from $12 to $950 per month. This charge compounds with the principal, so it's essential to understand how it will impact your loan over time.

Here's a summary of some of the costs associated with a reverse mortgage:

Keep in mind that these costs can vary depending on the lender and the specifics of your loan. It's essential to carefully review the terms and conditions of your loan to understand all the costs involved.

Income from a reverse mortgage set up as an annuity or as a line of credit should not affect Government Income Support entitlements.

However, income from a reverse mortgage set up as a lump sum could be considered a financial investment and thus deemed under the Income Test; this category includes all sums over $40,000 and sums under $40,000 that are not spent within 90 days.

Money received in a reverse mortgage is still considered a loan and therefore is not taxable income.

It therefore does not affect government benefits from Old Age Security (OAS) or Guaranteed Income Supplement (GIS).

The cost of getting a reverse mortgage from a private sector lender may exceed the costs of other types of mortgage or equity conversion loans.

Exact costs depend on the particular reverse mortgage program the borrower acquires and vary from lender to lender.

Depending on the program, there may be other costs.

The money received from a reverse mortgage is considered a loan advance. It therefore is not taxable and does not directly affect Social Security or Medicare benefits.

However, an American Bar Association guide to reverse mortgages explains that if borrowers receive Medicaid, SSI, or other public benefits, loan advances will be counted as "liquid assets" if the money is kept in an account (savings, checking, etc.) past the end of the calendar month in which it is received.

The loan may also become due and payable if the borrower fails to pay property taxes or homeowners insurance, lets the condition of the home significantly deteriorate, or transfers the title of the property to a non-borrower (excluding trusts that meet HUD's requirements).

The HECM reverse mortgage is not due and payable until the last borrower (or non-borrowing spouse) dies, sells the house, or fails to live in the home for a period greater than 12 months.

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A reverse mortgage is a versatile tool that can be used in many creative ways, including paying off your forward mortgage. With a HECM, you can turn some of the value of your home into cash without having to sell it.

You retain title or ownership of your home with a reverse mortgage, and the lender never owns the home, even after the last surviving borrower passes away. This is a crucial point to understand, as it ensures you maintain control over your property.

Here are some of the key features of a HECM:

With a HECM, you have options for how to receive the money you borrow. You can access funds through a line of credit, which is a standby line of credit that you only use when you need it.

Interest rates on reverse mortgages are higher than most other financial products, but you don't pay tax on the money you borrow. This can be a big advantage.

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You can use a HECM to pay off your forward mortgage, freeing up more money in your budget. This can be a huge relief, especially if you're living on a fixed income.

Here are some payment options to consider:

Keep in mind that you still own your home with a reverse mortgage, and you can choose when and how you receive the money. This can give you a lot of flexibility and peace of mind.

A reverse mortgage is a great option for homeowners who want to tap into their home's equity. With a reverse mortgage, the borrower always retains title or ownership of the home.

One of the key benefits is that the lender never owns the home, even after the last surviving borrower passes away. This means you can continue to live in your home without worrying about the lender taking possession.

You can use the funds from a reverse mortgage for any purpose, such as paying off debts, making home improvements, or covering living expenses. The lender will disburse the funds in a lump sum, monthly payments, or a line of credit.

The lender will make interest-only payments, which means the borrower is not required to make monthly mortgage payments. This can be a huge relief for homeowners who are living on a fixed income.

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Using a reverse mortgage calculator can give you an estimate of how much you may be eligible for. It's a great tool to get an idea of your potential financial gain.

For many homeowners, the equity they have built up in their home is their largest financial asset, typically comprising more than half of their net worth.

The calculator takes into account your home's value, outstanding mortgage balance, and your age to provide a personalized estimate. This can help you understand how a reverse mortgage can work for you.

Home equity is often the largest financial asset for homeowners, and it's essential to understand what it means and how it can be used.

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The world of reverse mortgages can be complex, but don't worry, we've got you covered. The most commonly used acronym for a Home Equity Conversion Mortgage is HECM, which is a reverse mortgage created by and regulated by the U.S. government.

There's only one type of reverse mortgage that's commonly used and regulated, which is the Home Equity Conversion Mortgage, or HECM. It's a specific type of reverse mortgage that's designed to help homeowners tap into their home's equity.

Reverse mortgages can be a complex and costly option. Interest rates are higher than most other types of financial products, making them a less desirable choice for some.

One of the biggest drawbacks of reverse mortgages is that the equity you hold in your home may go down as you accumulate interest. This means you'll have less ownership in your home over time.

Your estate may need to repay the reverse mortgage and interest within a set period of time when you die. This can put a significant burden on your loved ones.

The time needed to settle an estate may be longer than the time allowed to repay a reverse mortgage. This can lead to additional stress and financial strain.

There may be less money in your estate to leave to your children or other beneficiaries. This is because the reverse mortgage and interest will need to be paid off before any remaining assets can be distributed.

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The HECM for Purchase program allows homeowners to purchase a new principal residence with HECM loan proceeds. This program was effective January 2009, thanks to the Housing and Economic Recovery Act of 2008.

Texas was the last state to allow for reverse mortgages for purchase. This means that homeowners in Texas were among the last to benefit from this program.

Unlike traditional forward mortgages, there are no escrow accounts in the reverse mortgage world. This means that property taxes and homeowners insurance must be paid by the homeowner on their own, which is a requirement of the HECM program.

If a borrower fails to meet the satisfactory credit or residual income standards, a Life Expectancy Set Aside, or LESA, may be required. This carves out a portion of the reverse mortgage benefit amount for the payment of property taxes and insurance for the borrower's expected remaining life span.

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In the world of reverse mortgages, there are several types to consider, but one of the most popular is the Home Equity Conversion Mortgage (HECM). The HECM is a reverse mortgage created by and regulated by the U.S. government.

The HECM is also known by its acronym, HEKUM, which might sound unfamiliar, but it's a widely used term in the industry. This type of reverse mortgage allows homeowners to borrow money using the equity in their home.

Homeowners who are 62 or older are eligible for a HECM, and the loan amount is based on the home's value, the borrower's age, and current interest rates.

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Normal mortgages and reverse mortgages are two vastly different options. A normal mortgage allows you to take a loan from a bank to purchase real estate, with competitive interest rates for people with good credit scores.

You typically pay the loan back weekly or monthly over 25 years, with early payments largely consisting of interest and final payments mostly consisting of principal. The loan balance decreases every year, and at the end of the amortization period, the loan is entirely repaid.

There are only two federally regulated banks offering reverse mortgages in Canada, and their interest rates are considerably higher. With a reverse mortgage, you can receive a lump sum immediately, but instead of paying it back, interest is progressively added to the loan amount, growing exponentially over time.

You won't make any regular payments until you reimburse the entire loan back, which can be a significant burden. At the end, you'll pay back considerably more than what you borrowed, potentially up to the full market value of the residence.

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Reverse mortgages are offered by a variety of financial institutions, including banks, credit unions, and specialized mortgage companies.

These lenders provide reverse mortgages through various programs, such as Home Equity Conversion Mortgages (HECMs) and proprietary reverse mortgages.

Government agencies like the Federal Housing Administration (FHA) also play a role in offering reverse mortgages, particularly through the HECM program.

Reputable lenders must be approved by the FHA to offer HECM loans, which ensures they meet certain standards and requirements.

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Using a reverse mortgage as a buffer asset can provide peace of mind, especially in old age when long term care costs can be unpredictable. It's difficult to budget for long term care because the future costs are unknown.

One limitation of tapping home equity through a reverse mortgage is that at least one borrower must still live in the home, which secures the loan. This means the loan duration should be limited to avoid ballooning interest costs.

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A financial assessment is a crucial step in financial planning, especially for those considering a reverse mortgage. Lenders must conduct this assessment to ensure the borrower has enough money to pay ongoing costs.

This assessment is not just a formality; it's a necessary check to guarantee the borrower's financial stability. Lenders must consider property taxes and homeowners insurance, among other costs, to determine the borrower's ability to pay.

A financial assessment helps lenders understand the borrower's financial situation, including their income, expenses, and assets. This information is vital in making informed decisions about the loan.

By conducting a thorough financial assessment, lenders can identify potential risks and ensure the borrower has a stable financial foundation. This approach helps prevent financial strain and promotes long-term financial security.

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A buffer asset is a financial safety net that can help protect you from unexpected expenses. This can be especially important for long-term care costs, which can be difficult to budget for and may not even be needed.

Long-term care costs can be significant, and it's hard to predict how much you'll need. For example, you may eventually need funds to support home accessibility modifications and/or provide for long-term care, typically in old age.

One solution is to use a reverse mortgage to tap into your home equity. This can provide a source of funds if you need them, but it's essential to limit the duration of the loan to avoid ballooning interest costs.

At least one borrower must still live in the home that secures the loan, which can be a limitation. If you don't need the funds, you won't have to take out the loan at all, and your residence will remain part of your estate.

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As of May 2010, there were 493,815 active HECM loans originated in the U.S. The number of HECM mortgages that HUD is authorized to insure under the reverse mortgage law was capped at 275,000 as of 2006.

The HECM program has experienced rapid growth in recent years. In fiscal year 2001, only 7,781 HECM loans were originated.

By the fiscal year ending in September 2008, the annual volume of HECM loans topped 112,000, representing a 1,300% increase in six years. This growth can be attributed to the increasing demand for reverse mortgages as the U.S. population ages.

As of the fiscal year ending September 2011, loan volume had contracted due to the financial crisis, but remained at over 73,000 loans originated and insured through the HECM program.

The U.S. population is aging at a rapid rate, with the Census Bureau estimating that 34 million residents were sixty-five years of age or older in 2000, and projecting this number to rise to 62 million in 2025.