A reverse mortgage is a method of extracting equity from the home you live in, for those seniors who want to find an economic solution to stay in their home or pay out a departing spouse in a divorce. While most seniors use a reverse mortgage for this purpose, it can also be used to buy a home.
In a typical reverse mortgage if you qualify for enough money the loan will pay off all mortgage/liens on the property and offer additional cash or a line of credit or both. A reverse mortgage does not require any mortgage payments, they are optional. If no payments are being made, which is usually the case, the loan amount will grow at compound interest. This is the single biggest negative to having a reverse mortgage. Borrowers always retain title to their home, not the bank, and they pass title to their beneficiaries. The loan is not due and payable until all borrowers leave the house. This is a non-recourse loan which means borrowers and/or their heirs will never owe more than what the house is worth when the loan is due, even if the loan amount due is higher than the value of the home. Borrowers are still responsible for property taxes, homeowner's insurance, HOA dues, and assessments and if they go unpaid this will trigger a default.
Here are the main rules:
- One person must be 62 years old or older
- Proceeds are based on the age of the younger spouse- the older the younger spouse, the more money they qualify for
- All borrowers must complete third party counseling
- The property must be their primary residence (no 2nd homes or investment properties)
- Must have a lot of equity (40%-68% depending on age)
- Must pass a "financial assessment" test
We are often asked what happens when a couple is divorcing and they have a reverse mortgage on their home. Here are some options:
- Sell the home, pay off the reverse mortgage balance, and the split the proceeds
- If one spouse wants to stay in the home and they are able to pay out the spouse with other funds they can keep the reverse mortgage, as it does not become due until both borrowers leave the home
- Another option is to refinance the reverse mortgage with either a new reverse or a conventional loan and pay out the spouse that way (again, assuming there is enough equity and they qualify for a refinance)
- Once the departing spouse is paid out, he/she may be able to take out a new reverse mortgage to buy their next home as long as they have a large down payment (40% to 68% depending on age)
Be sure to work with the loan officer who specializes in these loans and get competing offers from other banks. There are now jumbo reverse mortgages for homes appraising up to $10 million that lend up to $4 million.
We do not endorse services and that anyone pursuing a reverse mortgage should investigate any service they use.