Reverse Mortgages

What is a Reverse Mortgage?
Qualifying for a Reverse Mortgage
Repaying a Reverse Mortgage
Benefits and Pitfalls to Reverse Mortgages
Important Questions to Ask a Lender
Tips to Protect Yourself with Reverse Mortgages

Types of Reverse Mortgages
For More Information

 

What is a Reverse Mortgage?

A "reverse mortgage" is a loan that allows you to convert the equity in your home into cash. The reverse mortgage gets its name because instead of repaying a loan and building equity like a traditional mortgage, you are receiving payments and decreasing the equity you have already built in your home.

With a reverse mortgage, you remain the owner of the home. Consequently, you continue to be responsible for paying property taxes, maintaining homeowners insurance, and making necessary repairs.

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Qualifying for a Reverse Mortgage

In order to qualify for most reverse mortgages:

You and any other borrowers must be at least 62 years of age.

The home that you use for a reverse mortgage must be your primary residence.

Allowable property types typically include single family, 2-4 unit, manufactured, or condominium homes.

Typically you must own your home outright or have a low mortgage balance that can be paid off with the proceeds from your new reverse mortgage.  

There is NO minimum asset or income requirement to qualify for most reverse mortgages. The loan is secured by the equity you have already built and the loan does not require monthly payments.

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Repaying a Reverse Mortgage

You do not have to repay the reverse mortgage as long as you and any other borrowers continue to live in the home, pay property taxes, maintain homeowners insurance, and keep the property in good repair.

The loan balance on your reverse mortgage only becomes due when you and any other borrowers leave the home permanently.  In other words, when you pass away or move. At that time, the amount loaned to you, together with interest, costs, and fees, must be repaid to the lender. The loan can be repaid by selling the home, refinancing into a traditional mortgage, or using other assets.

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Benefits and Pitfalls to Reverse Mortgages

As with any lending situation, there are benefits and pitfalls to reverse mortgages.

Benefits to Reverse Mortgages

Reverse mortgages allow you to access the equity you have built in your home and still maintain ownership.

You do not have to make monthly loan payments. The entire loan balance becomes due only when you permanently vacate the property.

With most reverse mortgages, there are no restrictions on how you use the payments. The money is yours to spend or save in any manner you see fit.

There are generally no minimum credit or income requirements for the loan.

The proceeds from the reverse mortgage are not taxed and not considered “income”.

Pitfalls to Reverse Mortgages

As with all mortgages, there are costs and fees associated with securing the loan. Fees include those associated with loan origination, mortgage insurance premiums, closing costs, and monthly servicing fees.  These fees are often higher than the fees associated with traditional mortgages and home equity loans.

If you choose to finance the costs associated with a reverse mortgage, they will increase your loan balance and accrue interest during the life of the loan.

Remember that payments you receive under a reverse mortgage are made against the equity in your home. When the reverse mortgage ends, the amount loaned to you along with interest, costs, and fees, must be repaid to the lender.

The loan is typically repaid by selling the home, obtaining another mortgage, or using other assets. The reverse mortgage is a nonrecourse loan – meaning the borrower will not owe more than the home is worth if the home is sold to repay the loan.  If the home is not sold and the loan is repaid with other funds, then you or your estate may owe the full loan balance – even if it is greater than your home's value. 

Because a substantial amount may be owed on a reverse mortgage when it ends, the only way to repay the loan may be to sell the home. So, if you want to keep the home in your family or preserve the equity you have already built for the benefit of your heirs, a reverse mortgage may not be the best option for you.

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Important Questions to Ask a Lender

The following is a short, but important, list of questions to ask your lender prior to signing any reverse mortgage documents.

How much can I borrow and how is that number determined?

How are payments made to me? What payment options do I have to choose from?

How much would my repayment total be and how is that number calculated?

Will any remaining equity be passed to my heirs upon full repayment?

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Tips to Protect Yourself with Reverse Mortgages        

  • Consult with an independent financial adviser to find out what reverse mortgage package best suits your financial situation and needs.
  • If you do not have a financial advisor, discuss your situation with a counselor approved by the US Department of Housing & Urban Development (HUD); HUD-approved counseling agencies are available to assist you with your reverse mortgage questions.
  • Always shop around for the reverse mortgage that best suits your financial situation and needs. In addition to comparing costs and fees, pick a lender that you trust and have good communication with.  Remember that nearly all reverse mortgage fees are government regulated but aren’t always compared or displayed in the same manner among lenders. 
  • Find out whether the reverse mortgage you are considering is insured by the FHA.  This will protect you when the loan comes due.
  • Find out whether your repayment obligation is limited to the value of your home at the time the loan becomes due.
  • Make sure any reverse mortgage payments are first made directly to you; do not allow anyone to persuade you to sign over the funds to someone else.
  • Ask yourself if the benefits of the reverse mortgage outweigh the costs involved.
  • Be wary of anyone who tries to pressure you into a decision that you are not completely comfortable with, such as investing the payments from your reverse mortgage into an annuity, insurance policy, or other investment product, or pressuring you into receiving a lump-sum payment over monthly payments.
  • If you are uncomfortable with the reverse mortgage that you entered into, exercise your right of rescission within three days of the closing. A right of rescission allows you to cancel the mortgage within three days of closing without penalty.

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Types of Reverse Mortgages

Home Equity Conversion Mortgage (HECM)

The HECM is the most popular reverse mortgage.

It is insured by the Federal Housing Administration (FHA).

It is only offered by federally-approved lenders through HUD (Housing and Urban Development), who must follow strict rules imposed by the federal government.

Borrowers must complete reverse mortgage counseling prior to processing.

Single-Purpose Reverse Mortgages

The payments received through these reverse mortgages can only be used for one purpose, such as home repairs, improvements, or paying property taxes. 

These are offered by state and local governments, or nonprofit lenders.

These are the least expensive reverse mortgages.

Other "Proprietary" Reverse Mortgages

Some other banks and financial institutions offer their own reverse mortgages.

These loans are NOT insured by the federal government. Because they are not insured by the federal government, the lenders are not subject to some of the rules and regulations that federally-insured reverse mortgage lenders are subject to (i.e., lenders of Home Equity Conversion Mortgages).

Borrowers may or may not have to complete reverse mortgage counseling prior to processing, depending on the rules of the individual lender.

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For More Information

Michigan State Housing Development Authority (MSHDA)

The Michigan State Housing Development Authority, established in 1966, provides financial and technical assistance through public and private partnerships to create and preserve safe and decent affordable housing, engage in community economic development activities, develop vibrant cities, towns and villages, and address homeless issues. General information is available online at http://www.michigan.gov/mshda. Or, contact MSHDA at (517) 373-8370.

United States Department of Housing and Urban Development (HUD)

HUD offers a wealth of information and services to individuals interested in reverse mortgages. General information about reverse mortgages is available on HUD’s website at: http://www.hud.gov/offices/hsg/sfh/hecm/hecmhome.cfm

The Federal Housing Authority (FHA), which is part of HUD, funds housing counseling agencies throughout the country that can give you advice on reverse mortgages.  To find a counselor near you, go to the “reverse mortgage counselors” link on the above web page.  You can also call 1-800-569-4287 to find a counselor in your area.

HUD also provides a list of area lenders that are approved for its HECM reverse mortgage.  To find an HECM lender in your area, go to the above web page and click on the link “reverse mortgage lenders.”

If you have any other questions, you can call HUD’s national toll-free hotline at (800) 225-5342.  Local HUD offices can also assist you.  You can call the Detroit HUD office at (313) 226-7900; the Flint HUD office at (810) 766-5112; or the Grand Rapids HUD office at (616) 456-2100.

American Association of Retired People (AARP)

The AARP website offers helpful information about reverse mortgages at www.aarp.org/revmort.

Included on the AARP website is an informative guide entitled “Reverse Mortgage Loans: Borrowing Against Your Home.”

You can also contact the AARP Michigan office for information on reverse mortgages by calling 1-866-227-7448.

Area Agencies on Aging

Local Area Agencies on Aging (AAA) provide information, assistance, and access to services to Michigan senior citizens.

Local AAA offices can direct you to information and resources that will help you with your reverse mortgage decisions.  You can call 517-373-8230 or visit www.michigan.gov/miseniors/ to get contact information for your local AAA.

To Report Problems With Your Reverse Mortgage

HUD:  Call HUD at 1-800-225-5342 to report problems that you are having with an HECM reverse mortgage, or to report any suspected fraud.

Federal Trade Commission (FTC):  Call the FTC at 1-877-382-4357 to report problems that you are having with a proprietary reverse mortgage offered by a bank or mortgage company.  You should also call the FTC to report any unfair or deceptive acts or practices that you encounter relating to a reverse mortgage.

Michigan Department of Insurance and Financial Services (DIFS):  You can report problems regarding your reverse mortgage to DIFS by calling 1-877-999-6442.  Depending on the company involved, DIFS will either help you with your complaint or refer your complaint to an agency that can assist you.

Attorney General Bill Schuette:  You can contact the Attorney General at 1-877-765-8388 for assistance with your reverse mortgage problem.  The Attorney General’s staff will help direct you to the correct agency for handling your problem.

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Who do I call to report welfare or Medicaid fraud?

Welfare or Medicaid fraud should be reported to:

Department of Human Services
Office of Inspector General
P.O. Box 30037
Lansing, MI 48909
(517)335-3899

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