- The borrower(s) must sign their home over to the bank.
The title to the property does not change. A reverse mortgage is just a lien, the same as a traditional mortgage or home equity line. The borrower retains full disposition rights to their property.
- The bank will take the home upon the death of the last borrower.
At the time of the last borrower’s death, the property will enter probate. The beneficiaries can either refinance the balance of the reverse mortgage, retaining ownership in the home, or sell the property, whereupon the loan is repaid and the remaining equity belongs to the estate.
- The borrower(s) can withdraw most or all of the equity out of their home.
The borrower cannot withdraw all of the equity in their home. The lender determines the loan amount. The older the borrower(s), the larger the loan amount that will be made available. Seniors can receive the proceeds the following ways:
- Lump Sum – receive all the funds at closing (may be subject to escrow).
- Line of Credit – retrievable upon request.
- Monthly Payments – for as long as they live in their home. NOTE – A borrower can receive a life monthly payment, which could exceed both the initially approved loan amount and the value of the home over a long period of time if the borrower lives far past actuarial expectations.
- Closing costs are high.
For some reverse mortgage programs, the closing costs are significant, but still far less than one year of typical appreciation on a $300,000 home. Some programs require a one-time mortgage insurance premium payment that protects the homeowner and the lender. There are some reverse mortgage programs that have closing costs rebate. All closing costs are withdrawn from the gross reverse mortgage loan amount, so that the borrower(s) need not bring a check to the closing.
- Interest rates are high and are charged on the total available loan amount.
Interest rates are low — currently ranging from 2.25% to 5.25% (5/2014). Reverse mortgage programs can be adjustable or fixed rate loans. All have lifetime interest rate caps. Interest is only charged on the borrowed loan amount – not on the total loan available.
Reverse Mortgage Realities
- There are NO income, NO asset and NO credit worthiness qualifications. NOTE – the borrower(s) cannot currently be in bankruptcy.
- There is NO mandatory monthly repayment. The loan does not have to be repaid until the senior either sells, transfers or permanently leaves the property, but can be repaid (in whole or in part) at any time without penalty.
- The interest costs may be deductible whenever they are repaid (annually or at the final pay-off). [Remember, this is mortgage interest we are talking about here.]
- Proceeds from a reverse mortgage are not income and therefore do not affect the benefits from Social Security, Medicare and are not subject to attachment by Medicaid.
- The proceeds from a reverse mortgage can be used for whatever seniors wish.
- Pay-off existing mortgage(s) and outstanding liens.
- Make home repairs and/or maintenance.
- Money toward daily living expenses.
- Pay premiums for long-term care insurance and/or life Insurance.
- Fund gifts/trusts for children and/or grandchildren.
- Fund estate and/or financial plan