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What is a Reverse Mortgage and how does it work?

A reverse mortgage allows homeowners age 62 and older to convert a portion of their home equity into cash while they continue to live at home for as long as they want.
 

Two types of reverse mortgage loans are available:

  --  Home Equity Conversion Mortgage (HECM) - loans offered by the U.S.

Department of Housing and Urban Development (HUD) that are insured by

the FHA.  HECM borrowers must receive counseling from an independent,

HUD-approved counseling agency before taking out this loan.

 --  Proprietary reverse mortgages - designed for seniors with high value homes.

Unlike conventional mortgages, there are no income or credit requirements. Borrowers do not need to make payments as long as they continue to live in the home, but as the homeowner, they are still responsible for paying property taxes, hazard insurance, and maintaining the home.

The money borrowers receive is tax-free, and can be used for any purpose. Borrowers can receive payments in various ways, such as fixed monthly payments or a lump sum.
 

  Older Americans and Home Equity
 

  --  In 2007, about 82 percent of the households headed by people age 65 to

74 were homeowners, as were almost 78 percent of those age 75 and older.

  --  The proportion of seniors with some type of home loan has grown from 23 percent in 1999 to 32 percent in 2007. Most of these loans are conventional mortgages or home equity loans.

  --  The annual number of reverse mortgage loans has risen from about 6,600 loans in 2000 to over 112,000 loans in fiscal year 2008. 

  --  Reverse mortgage borrowers represent about 1 percent of the mortgage market.

  Recent Federal Legislative Changes

The Housing and Economic Recovery Act of 2008 includes several ways to make it safer and less costly for seniors to take out a reverse mortgage. Under the new law:

  --  The amount a senior can borrow was increased to $625,500 nationally.

  --  The origination fee is reduced to 2 percent of the first $200,000 borrowed and 1 percent for any amount after that. The minimum origination fee is $2,500 and cannot exceed $6,000.

  --  Lenders cannot require borrowers to buy other financial products (such as annuities or insurance) as a condition for a reverse mortgage.

  NCOA's Role

NCOA is working with policymakers and the aging community to make the reverse mortgage market work better for vulnerable seniors, and to help older homeowners understand their options and risks so they do not lose the home equity they have spent a lifetime to accumulate.

NCOA became a HUD HECM Counseling Intermediary in 2007, and created a counseling network -- Reverse Mortgage Counseling Services -- as a pilot project to encourage social services agencies to offer reverse mortgage counseling .

NCOA was added to the national roster of reverse mortgage counseling intermediaries in 2009. We are now expanding this service to further improve consumer education for seniors.
 

NCOA is a member of the National Housing Counseling Association (NHCA). NHCA's mission is to improve the quality and transparency of reverse mortgage counseling.

Source: National Council on Aging