If you’re over the age of 62 and own a home, a reverse mortgage can help you turn your home’s equity into cash. But while the commercials advertising these loans make it sound simple, there’s actually a lot more to it than that.
As the retiree capital of the country, it’s no surprise that reverse mortgages in Florida are so popular. But a reverse mortgage is not free money, and many Floridians end up misusing this type of loan or falling victim to scams.
In the right situation, a reverse mortgage can be a great financial solution during retirement. On the other hand, if you’re not careful, it can lead to financial disaster and even foreclosure.
The more you know about how a reverse mortgage in Florida works, the better off you’ll be. So before you sign on the dotted line, here are seven things you should know.
1. A reverse mortgage shouldn’t be your only source of retirement income.
While the ads on TV can be misleading, they’re right when they say that a reverse mortgage can help you cover unexpected costs throughout your retirement. However, it shouldn’t be the only part of your financial strategy.
The money you earn from your home’s equity from a reverse mortgage should be supplemented by one or several of the following:
- Social Security
- Rental income
- Part-time job
There is no one-size-fits-all retirement plan, but it does help to have multiple sources of income instead of putting all of your eggs into one basket.
2. There are different types of reverse mortgages.
Most reverse mortgages are insured by the Federal Housing Administration (FHA). These are called House Equity Conversion Mortgage (HECM) loans. With a HECM loan, you will never have to pay your lender more than what you borrowed or more than your home is worth.
Don’t assume that every reverse mortgage in Florida is a HECM loan with the same protections that a federally insured loan offers. But depending on your situation, a non-HECM loan might actually be a better option.
To help you understand your options, here are the main types of reverse mortgages in Florida in a nutshell:
As we’ve already mentioned, HECM loans are backed by the federal government and include consumer protections that make them a relatively low-risk borrowing option.
Because they are easily the most popular type of reverse mortgage in Florida, most of this guide pertains to HECM loans. As we’ve already mentioned, you’ll never have to pay back more than what you’re home is worth. If the value of your home has decreased, the government will pay the difference. None of the financial burden will fall on you or your heirs.
Along with extra protections, a HECM loan also requires extra steps. For instance, you’ll need to meet with a mortgage counselor to make sure you understand how a reverse mortgage works and if it’s really the best option for you.
Proprietary Reverse Mortgages
Also called jumbo loans, this type of reverse mortgage is for seniors whose homes are valued above the FHA’s borrowing limit, which is capped at $726,525 as of 2019.
Backed by private lending companies, these loans typically don’t include the same protections as government-backed loans. That being said, proprietary reverse mortgages don’t have as many requirements or charge as many fees, making them an appealing option for some retired homeowners.
Single Purpose Reverse Mortgages
Another non-federally back loan option available is called a single purpose reverse mortgage. These are offered by local governments and nonprofits and allow homeowners to tap into a small amount of their equity for a single purpose. Usually, that purpose is either to make repairs to the home or pay off property taxes.
3. A reverse mortgage must be repaid (and it may need to be repaid sooner than you think).
A reverse mortgage is a type of loan, and like any loan, it must be repaid. Unlike a traditional home loan, you don’t make payments month-to-month. Instead, you repay the entire loan at once.
As you probably already know, a reverse mortgage is repaid by selling the home that’s securing the mortgage. The funds from the sale are used to repay the mortgage, and the borrower (or their heirs) keep any remaining proceeds.
If the sale value of your home turns out to be less than what you owe, most reverse mortgages are non-recourse, meaning that the FHA will make up the difference.
While most reverse mortgage borrowers understand how reverse mortgages are repaid, the confusion that often surrounds these loans has to do with when they need to be repaid.
Many borrowers falsely assume that their reverse mortgage payment won’t become due until they pass away, but there are several other factors that could cause your loan to reach maturity and require repayment sooner than you expect.
- You are no longer the home’s primary resident. If you do not occupy the home as your primary residence for more than 12 consecutive months, your reverse mortgage will become due. This commonly occurs when someone becomes ill, moves into senior care, or rents out their home to someone else.
- You fail to pay property taxes/insurance. If you are unable to keep up with your property tax and insurance payments, your lender can file for foreclosure, forcing you to leave your home. In this situation, it is possible to avoid foreclosure and stay in your home with the help of financial assistance programs.
- You’re unable to make necessary repairs. Most reverse mortgages require borrowers to maintain certain health and safety standards. If your home violates these standards and you are unable to remedy the situation, your lender has the right to file for foreclosure.
4. Your heirs may not be responsible for paying off the loan, but they’ll still be involved in the process.
One of the most appealing qualities of a federally-backed reverse mortgage is that your heirs (those who will inherit the property after you) won’t be responsible for paying it off if you pass away before selling the home. However, that doesn’t mean that they won’t be involved at all.
In fact, your heirs will have an important choice to make – sell the home, or take out a new mortgage and keep it?
Before you even apply for a reverse mortgage, you’ll want to make sure that your family members fully understand and are on board with the situation. When the borrowers die and the loan becomes due, heirs only have 30 days to decide what to do next.
Making this decision early will save a lot of stress down the road. The three options heirs have are:
- Selling the home. Whether the borrower or an heir sells the home to repay the mortgage, the process is the same for HECM loans. Your heir will keep any remaining proceeds from the sale. If the home’s value is less than what’s owed, they’ll still be able to satisfy the loan for selling the home for at least 95% of the appraised value.
- Transferring the deed to the lender. Selling a house isn’t always easy, so it makes sense that borrowers don’t want to burden their children with the task. Luckily, HECM reverse mortgages give heirs the option to transfer the home’s deed to the lender. If you, the borrower, chose to do this, it would have a negative impact on your credit score for up to seven years. Heirs, on the other hand, will not have their credit score affected.
- Paying off the loan and keeping the home. A family home is of great sentimental value. If your heirs would like to keep the home, they can choose to pay off the loan or take out a new mortgage that covers the value of the reverse mortgage. Just make sure your family knows that they only have six months after the loan reaches maturity to do so.
While FHA-backed loans include many protections for heirs, private loans may not. Be sure to discuss the responsibilities of your heirs with your lender and include your family in the decision process.
5. There are more fees involved with reverse mortgages in Florida than traditional mortgages.
Reverse mortgages in Florida backed by the FHA include some great protections, but those protections come at a cost. In addition to the usual closing costs associated with a mortgage, there are also fees associated with HECM loans that you may not know about.
- Counseling fee (Varies, but typically around $125)
- Home appraisal fee (Between $300 and $500)
- Origination fee ($2,500 OR 2% of the first $200,000 of your home’s value and 1% of any additional value, whichever is greater – this fee is capped at $6,000)
- Mortgage insurance (2% of your home’s value upfront, 0.5% of your outstanding loan balance annually)
Whether you choose a HECM loan or a jumbo loan, always ask your lender for a detailed list of fees and other costs so that you know exactly what you’re getting into and if you can afford it.
6. Be prepared to meet with a mortgage counselor.
Before you’re able to apply for an FHA-backed reverse mortgage in Florida, you’ll be required to meet with a certified mortgage counselor. A counselor is an unbiased third-party – they should not try to steer you toward or away from a reverse mortgage. Instead, their goal is to give you as much information as possible so that you can make an educated decision.
Counseling sessions can be completed over the phone or in person. After the session, you’ll receive a certificate of completion that you can show to your lender that allows you to move forward with the mortgage application process.
The website for the US Department of Housing and Urban Development (HUD) has a search tool you can use to find a counseling agency near you.
7. The amount you can borrow against depends on several factors.
One of the most common questions people have about reverse mortgages is how much they can borrow.
The amount of your home’s equity that you’re able to borrow against depends on what type of reverse mortgage you choose. For HECM loans, the maximum ranges from $484,350 to $726,525 depending on what part of the country you live in. Jumbo loans allow you to borrow more but tend to have stricter approval requirements.
It’s important to know that you cannot borrow against 100% of your home’s equity, even if your mortgage is entirely paid off. Instead, the amount you can borrow with a HECM loan is determined by something called a “principal limit factor”, or PLF.
Calculating Your PLF
Your PLF takes into account your home’s appraisal value, the age of the youngest eligible spouse, and the lender’s margin. Don’t worry – your lender will be able to calculate this for you, or you can use an online reverse mortgage calculator.
The PLF is multiplied by your property value (or $625,000 – whichever number is lower) to come up with the maximum loan amount you can borrow. For example, if your PLF is 0.50 and your home’s value is $400,000, you would be able to borrow up to $200,000 through a reverse mortgage.
Talk to a Mortgage Professional
The best way to know if you should apply for a reverse mortgage in Florida? Talk to a local mortgage professional. A trustworthy lender will help you to assess your situation based on your finances, health, and age.
Applying for a reverse mortgage is a big decision, and you probably still have questions. The team at Associates Home Loan of Florida is committed to providing families in the Tampa Bay area with all the information they need to make smart financial decisions. And if you do decide that a reverse mortgage loan is best for you and your family, our lenders will be there to support you throughout the entire process.
Give us a call at 813-774-4285 or email us at [email protected] today to chat with a local lender about your options for a reverse mortgage in Florida.