What is a Reverse Mortgage

What is a Reverse Mortgage - If you're a retiree who owns your own home, chances are you've received at least one direct mail, telephone, or in-person solicitation regarding reverse mortgages.

When faced with so much confusing information, it's easy to feel overwhelmed. To help ease the confusion, let's explore the basics of of a reverse mortgage, how the process works, and where you can turn for additional information.

What is a Reverse Mortgage?

A reverse mortgage, also known as a Home Equity Conversion Mortgage (HECM), is a program that enables homeowners over the age of 62 to convert a portion of their home equity into cash. Unlike a traditional home equity loan, a reverse mortgage does not require repayment until the borrower(s) no longer use the home as their primary residence, or when the surviving borrower passes away.

How does the Reverse Mortgage process work?

During the initial contact with a reverse mortgage lender, you'll likely be asked to provide your birthdate(s), home address, the value of your home, and the current balance on your home mortgage, if any. After gathering this information, the lender will discuss how much money will be available to you, as well as the fees involved, and provide a quotation containing the following documents:

  • Reverse mortgage estimates page

  • Good Faith Estimate outlining the fees

  • Amortization schedule showing how the loan balance will grow over time

  • Total Annual Loan Cost (TALC) demonstrating the total cost of the loan over time
If you decide to move forward, you'll have a counseling session with an independent HECM counselor, a requirement for all reverse mortgage loans. During this session, you'll discuss the documents you received from your lender, receive a thorough explanation of the reverse mortgage process, and identify reverse mortgage alternatives.

Following your counseling session, you'll receive a certificate in the mail, which will need to be signed and returned to the lender in order to move forward. Next, the process follows a similar path as when you purchased your home: an application, appraisal, title report, and opening of escrow. After the information is gathered, it will be forwarded to an underwriter for approval. Once received, you'll sign the final documents and close on your loan.

How is my loan funded?

Reverse mortgages are funded using one of the following three payment options:
  • Lump sum payment

  • Equal payments for as long as both borrowers live in the home

  • Equal payments for a set period of time
Money received from a reverse mortgage is tax free and does not affect Social Security or Medicare payments, although the payments can affect eligibility for Medicaid and other state or federal assistance programs.

Where can I learn more about what is a reverse mortgage?

The FHA (Federal Housing Administration) provides free information and HECM counseling to homeowners. To learn more, please call 800-569-4287.

Before obtaining a reverse mortgage, it's best to discuss your plans with family and friends, or a trusted financial advisor. As with any financial decision, be sure that you have a thorough understanding of the terms to which you are agreeing before you sign.

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