Al W/ Hensling, president of United American Mortgage Corporation addresses frequently asked questions and clears up common misconceptions
It is estimated that approximately two-thirds of Americans will receive more than 50% of their retirement income from Social Security.
But seniors who are concerned about the future of Social Security (or whether they will outlive their retirement savings), may want to look to their home equity as another possible source of income.
A reverse mortgage is a retirement asset that can be effectively utilized as part of a retirement income plan to support your retirement goals and needs - and help retirement-age homeowners “age in place.”
In the following interview, we asked Al W. Hensling, president of United American Mortgage Corporation, to address some of the more frequently asked questions and clear up common misconceptions regarding reverse mortgages:
Q: What is a reverse mortgage and how does it work?
A: A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that you built up over years of making mortgage payments can be paid to you. However, unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage. You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.
Q: If I take out a reverse mortgage, will the bank own my home?
A: No, you continue to own your home just the same as with a regular mortgage.
A reverse mortgage does not affect regular Social Security or Medicare benefits. However, if you are on Medicaid or Supplemental Security Income (SSI), any reverse mortgage proceeds that you receive must be used immediately.
Q: What is the difference between a reverse mortgage and a home equity loan?
A: With a second mortgage, or a home equity line of credit, borrowers must make monthly payments on the principal and interest. A reverse mortgage is different, because it pays you – there are no monthly principal and interest payments. With a reverse mortgage, you are required to pay real estate taxes, utilities, and hazard and flood insurance premiums.
Q: Are there any special requirements to get a reverse mortgage?
A: To be eligible for a FHA HECM, the FHA requires that you be a homeowner 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, have the financial resources to pay ongoing property charges including taxes and insurance, and you must live in the home. You are also required to receive consumer information free or at very low cost from a HECM counselor prior to obtaining the loan. You can find a HECM counselor online or by phoning (800) 569-4287.
Q: Will I lose my government assistance (Social Security and Medicare) if I get a reverse mortgage?
A: A reverse mortgage does not affect regular Social Security or Medicare benefits. However, if you are on Medicaid or Supplemental Security Income (SSI), any reverse mortgage proceeds that you receive must be used immediately. Funds that you retain count as an asset and could impact 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.
Q: How much money can I get and are there restrictions on how the proceeds may be used?
A: The amount of funds you are eligible to receive depends on your age (or the age of the youngest spouse when there is a couple), appraised home value, interest rates, and in the case of the government program, the FHA lending limit, which is currently $625,500. If your home is worth more, then the amount of funds you may be eligible for will be based on the $625,500 loan limit. 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.
During the first 12 months after closing, a borrower cannot access more than 60 percent of the available loan proceeds. In month thirteen, a borrower can access as much or as little of the remaining funds as he or she wishes.
There are exceptions to the 60 percent rule. If you have an existing mortgage, you may pay it off and take an additional 10 percent of the available funds, even if the total amount used exceeds 60 percent.
Benefits of a Reverse Mortgage
- No Loan Repayment Required As Long As You Live in Your Home
- Retain Full Ownership of Your Home
- Tax-Free Funds As Long As You Live in Your Home
- Loan is Insured By the Federal Government
- You Can Choose the Method to Receive Your Funds that Best Suits Your Needs