Once those liens are paid off, any additional available loan proceeds can go directly in your pocket for any purpose, tax-free. The amount loaned will accrue interest at the negotiated interest rate. Reverse mortgages can be obtained at fixed or variable interest rates. If you opt for a fixed rate, you can take your proceeds only in one lump sum.
If you are willing to assume the interest rate risk, you can obtain a variable rate reverse mortgage and receive monthly payments over a fixed time frame or even for your lifetime. In the variable rate scenario, the interest rate may change each month and will accrue, but need not be paid. As with regular adjustable rate mortgages, the interest rate is based on an index, in this case the monthly LIBOR rate, currently at 0.25 percent. Added to the index is the margin, currently set at 3 percent. Thus, current reverse mortgages are being originated at 3.25 percent. Interest rates are capped at 10 percentage points over the initial origination rate.
Common misconceptions about reverse mortgages are numerous. Reverse lenders cannot kick you or your surviving spouse out of your home so long as you continue to pay your property taxes and insurance. The reverse mortgage continues until the last surviving borrower sells, moves or dies. Another myth is that your heirs will be stuck paying off your reverse mortgage. Not true. Neither you nor your heirs will ever have to pay off a reverse mortgage out of pocket. If, at the time the reverse mortgage becomes due, your home still has equity, your heirs can sell your home, pay off the reverse mortgage and keep the excess. If your home does not have any equity at that time, your heirs can just walk away with no personal liability.
Since reverse lenders base their lending decision solely on your home’s appraised value and your age, your credit score is not a factor. There is no need to provide any financial statements or tax returns. Applying is relatively easy. You will need to provide copies of your deed, photographic proof of identity, Social Security number and age, proof of homeowners insurance and a HUD-approved certificate attesting that you have completed a mandatory reverse mortgage educational and counseling class. Often the only cash required is a $300 appraisal deposit.
For homeowners who have retained some home equity, who are at least 62 years old and who plan to remain in their homes for the foreseeable future, a reverse mortgage may provide an ideal way to tap into that equity for today’s needs.
Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord and lender. This column is not legal advice and should not be acted upon without obtaining legal counsel. Jacobs can be reached at firstname.lastname@example.org.