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What is a Reverse Mortgage?

A reverse mortgage is similar to a regular forward mortgage in that a bank loans money to a borrower using the equity of the home as collateral. Unlike a 15 or 30 year forward mortgage the reverse mortgage is open ended and requires no monthly repayment by the borrower to the bank. The borrower is obligated to repay the bank the loan plus accumulated interest at the end of the mortgage. The end of the mortgage occurs upon death or sale of the property.

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Who Qualifies for a Reverse Mortgage?

All borrowers must be at least 62 years old. For a reverse mortgage in Texas, if one person is 62+ and the spouse is less than 62, the younger spouse may disclaim from the note and deed of trust. The downside to this scenario is if the older spouse passes away or leaves the home for 12 months, the lender will require repayment. In most cases the surviving spouse will be forced to sell the home to repay the bank.

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Do I Have to Own My Home Free and Clear?

No. Most people today are actually getting reverse mortgages to pay off a current mortgage, thereby eliminating the mortgage payment to free up funds to pay other important life expenses.

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Does the Bank Have Ownership of the Home?

The bank has absolutely no ownership in the home. It simply has a lien against the property known as a reverse mortgage.

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What are the Closing Costs for the Texas Reverse Mortgage?

Closing costs are higher than forward mortgages. The primary reasons are that costs are generally charged on the value of a home rather than the actual loan amount. Additionally, FHA charges 2% of the value of the home for mortgage insurance. The lender's origination fee is .5% to 1% higher than a typical forward mortgage. Outside of those fees the costs are similar to traditional forward mortgages.

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How are Closing Costs Paid?

Borrowers may pay costs out of pocket or roll the closing costs into the loan. Most borrowers opt to roll the closing costs into the mortgage.

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How Much Money Can I Expect to Receive?

For FHA insured mortgages valued below the FHA maximum lending limits ($417,000 in Texas), borrowers can expect to receive 45% to 75% of the value of their home. The spread is wide because of multiple variables. Lenders must be on guard for the possibility that one day more will be owed on the home than the home is actually worth. Therefore, older borrowers are likely to get more money than younger borrowers for the simple reason that they have a statistically higher chance of being out of the home sooner.

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How Do I Receive Proceeds from the Reverse Mortgage?

Four ways to receive proceeds currently exist:

  • Fixed Monthly Payments: This offers a monthly, tax free, income. In this instance a calculation will be made, based upon the borrower's age, interest rates, and the value of the house, as to how much tax-free income the borrower will receive on a monthly basis.
  • Lump Sum: The borrower may take some or the entire amount out all at one time.
  • Line of Credit: Allows money to be taken out at any time and interest is accrued only on moneys taken out. This has become the most popular plan because it allows the borrower to take money out on an "as needed basis", and any unused portion of the line of credit actually accrues interest and grows for the borrower's benefit.
  • Combination: Most people, unless they plan on using the entire portion of the loan immediately, tend to combine two of the three plans listed above. A good example of this: John and Mary Smith own a $300,000 home. The lender will loan the Smiths up to $195,000 for their Texas reverse mortgage. The Smiths have a mortgage on their home of $75,000. They use the reverse mortgage to pay off their existing mortgage, and use the remainder of the reverse mortgage as a line of credit. Of the $195,000, $75,000 is used to pay of the current mortgage and $120,000 remains in a line of credit for the Smiths to draw upon at any time.

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Is Income From a Reverse Mortgage in Texas Taxable?

It is not taxable and does not affect social security and Medicare. However, if the borrow receives Medicaid or SSI exceeding the maximum asset levels can negatively affect those benefits. For those in this situation, the line of credit option, as outlined above, is an easy way to take money out as needed and used such that the borrower's asset limits are not exceeded. In this regard, make sure you check with your local Area Agency on Aging prior to moving forward on a reverse mortgage.

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How May I Use the Money From the Reverse Mortgage?

It may be used however the borrower sees fit. It is the borrower's money. The following is a list of the most popular ways people are using proceeds from the reverse mortgage.

  • Paying off bills
  • Purchase of long-term care and life insurance
  • Paying Off mortgage to relieve monthly payment
  • General living expenses
  • Home repair and remodeling
  • Prescription Drugs and healthcare costs
  • Travel and other recreation
  • Helping family member

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When Does the Mortgage End?

This is a common question because people are familiar with mortgages ending in 15 and 30 years. Reverse mortgages in Texas and elsewhere are open ended mortgages. They have no set ending date. There are three main reasons a reverse mortgage comes to an end.

  • Borrower Sells the Home. This is the most obvious of the three. Once the house sells the mortgage company's lien gets paid off.
  • Borrower Moves Out of the Home for 12 Months. Reverse mortgages are for primary residences. Once the borrower is out of the home for 12 months the home is no longer a primary residence, and the lender must call the note due and payable.
  • Death. There may be two people on the mortgage note and deed of trust. When the last person on the note and deed of trust passes away, the lender must call the note due and payable.
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    How Does the Lender Get Paid Back?

    Generally, the lender is paid when the home sells. In the case of death, the home is typically willed to the estate. The estate is then required to pay the Texas reverse mortgage lender the amount of the original loan plus interest. Typically, the estate sells the home to do this.

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    How Long Does the Bank Give the Estate to Sell the Home?

    Reverse mortgage lenders in Texas generally give 6 months to sell the home and 3 month extensions thereafter. The lenders don't want the home and would prefer it continues to accumulate interest while it is being sold. With this in mind, after six months and no sale, the lender will review the listing agreement with the local realtor, comparable properties, and the marketing process. Assuming the property is being marketing competently, the lender will give a 3 month extension. If, after the first the three month extension, the home still hasn't sold, the lender will give another three month extension, and so on.

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    What if More Money is Owed to the Bank than the Home is Worth?

    Reverse mortgages are known as "non-recourse" loans, meaning if, under the circumstance more is owed to the lender than the home is worth, and the loan is due based upon death, sale, or vacating the premises, the maximum amount the heirs are required to pay the lender is the value of the home at the time of repayment. The bank cannot come after the family ("non-recourse") for the difference.

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    Who Gets the Proceeds if Less is Owed to the Bank than the Home is Worth?

    Like any other mortgage, a reverse mortgage in Texas works similarly. The people who own the home prior to sale get the proceeds. If the borrower sells the home, he or she gets the proceeds. If the heirs end up selling the home, they get the proceeds.

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    What is Considered an Eligible Property?

    Eligible properties include owner occupied single family residences, 2-4 unit properties in which the borrower lives in at least one of the units, double or triple wide manufactured homes built after 1976 with FHA approved foundation, condominiums, and townhouses.

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    How Are Property Taxes and Homeowner's Insurance Handled?

    These are the borrower's responsibility. They must be handled and paid outside the mortgage.

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    How Does the Mortgage Company Make Money?

    The mortgage company makes money from the accumulation of interest on moneys loaned to the borrower. Remember, the borrower makes no payments but interest is still be charged and accumulates over time. Typically, when the borrower or the heirs sell the home, the mortgage company is paid back.

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    How Likely is it That I Won't Have Equity When the Home is Sold?

    Not very likely. This is the worst possible scenario for a mortgage company. This is why they only loan from 45% to 75% on the value of the home. Banks use actuarial tables just like insurance companies and wouldn't lend money to you unless the numbers tell them it's a good deal for them. Certainly, there will be an occasional situation when more is owed than the home is worth, but it will be the exception to the rule.

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