Frequently Asked Questions About Reverse Mortgages

A reverse mortgage enables older homeowners (62+) to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you. Below are some common questions asked by consumers about reverse mortgages.

What are my payment plan options?
You can choose to receive the money from a reverse mortgage all at once as a lump sum, fixed monthly payments either for a set term or for as long as you live in the home, as a line of credit, or a combination of these. The most popular option – chosen by more than 60 percent of borrowers – is the line of credit, which allows you to draw on the loan proceeds at any time.

My understanding is that the unused balance in the Line of Credit option has a growth feature. Does that mean I'm earning interest?
No, you're not earning interest like you do with a savings account. The growth factor takes into consideration that your home has appreciated in value over the past 12 months and that you are one year older.

How much money will I get?
No matter which reverse mortgage product you choose, the amount of funds you are eligible to receive depends on your age (or the age of the youngest spouse in the case of couples), appraised home value, current interest rates, and the lending limit in your area. In general, the older you are and the more valuable your home (and the less you owe on your home), the more money you can get.

Does my home qualify?
Eligible property types include single-family homes, 2-4 unit properties, manufactured homes (built after June 1976), condominiums, and townhouses. In general, co-ops are not allowed.

How can I use the proceeds from a Reverse Mortgage?
The proceeds from a reverse mortgage can be used for anything, whether its to supplement retirement income to cover daily living expenses, repair or modify your home (i.e., widening halls or installing a ramp), pay for health care, pay off existing debts, buy a new car or take a "dream" vacation, cover property taxes, and prevent foreclosure.

Are there any special requirements to get a Reverse Mortgage?
As long as you own a home, are at least 62, and have enough equity in your home, you can get a reverse mortgage. There are no special income or medical requirements.

What if I have an existing mortgage?
You may qualify for a reverse mortgage even if you still owe money on an existing mortgage. If you currently owe any debt on your home, and do not pay it off before getting a reverse mortgage, you must take at least that amount as a lump sum advance at closing, and use it to pay off your debt at that time. This would reduce the amount of cash available to you in a single lump sum, creditline or monthly advance. If you do not qualify for enough cash to pay off any debt on your home at closing, you cannot get a reverse mortgage.

What Is the Service Fee Set-Aside?
Under the FHA HECM program, you will be charged a monthly servicing fee that ranges from $30-$35 to manage your account once the loan closes. The SFSA is an estimate of what the total servicing fees will be over the life of the loan, by multplying your life expectancy (converted from years into months) multiplied by either $30 or $35. Although it's not considered a closing cost, the SFSA can equal several thousand dollars, which is deducted from your available loan proceeds. You do not have access to that money, nor do you earn interest.

Will I lose my government assistance if I get a Reverse Mortgage?
A reverse mortgage does not affect regular Social Security or Medicare benefits. However, if you are on Medicaid, any reverse mortgage proceeds that you receive must be used immediately. Funds that you retain would count as an asset and could impact Medicaid eligibility. For example, if you receive $4,000 in a lump sum for home repairs and spend it all the same calendar month, everything is fine. Any residual funds remaining in your bank account the following month would count as an asset. If the total liquid resources (including other bank funds and savings bonds) exceed $2,000 for an individual or $3,000 for a couple, you would be ineligible for Medicaid. To be safe, you should contact the local Area Agency on Aging or a Medicaid expert.

Why do I need to get counseling?
Counseling is one of the most important consumer protections built into the program. It requires an independent third-party to make sure you understand the program, and review alternative options, before you apply for a reverse mortgage.
Counseling is required for all reverse mortgages and may be conducted face-to-face or by telephone.

By law, a counselor must review:

1. options, other than a reverse mortgage, that are available to the prospective borrower, including housing, social services, health and financial alternatives;
2. other home equity conversion options that are or may become available to the prospective borrower, such as property tax deferral programs;
3. the financial implications of entering into a reverse mortgage; and,
4. the tax consequences affecting the prospective borrower’s eligibility under state or federal programs and the impact on the estate or his or her heirs.