Reverse Mortgages: What You Need to Know
What is a reverse mortgage?
A reverse mortgage is a type of mortgage loan that is generally available to homeowners 60 years of age or older that permits you to convert some of the equity in your home into cash while you retain ownership. This can be an attractive option for senior citizens who may find themselves “house rich” but “cash poor,” but it is not right for everyone. Please consult a lawyer, financial advisor or housing counselor before you make any decisions.
In a reverse mortgage, you are borrowing money against the amount of equity in your home. Equity is the difference between the appraised value of your home and your outstanding mortgage balance. The equity in your home rises as the size of your mortgage shrinks and/or your property value grows.
The interest on a reverse mortgage loan is compounded. This means that you are paying interest on both the principal and the interest which has already accrued each month. Compounded interest causes the outstanding amount of your loan to grow at an increasingly faster rate. This means that a large part of the equity in your home will be used to pay the interest on the amount that the lender pays to you the longer your loan is outstanding.
Reverse mortgages are “non-recourse” loans, which means that if you default on the loan, or if the loan cannot otherwise be repaid, the lender cannot look to your other assets (or your estate’s assets) to meet the outstanding balance on your loan.
No payments are due on a reverse mortgage until some trigger event, such as moving out of the home or death of the borrower.
Is a reverse mortgage right for me?
A reverse mortgage is a complex financial product and you should carefully consider whether it is right for you. When considering whether to apply for a reverse mortgage, you should consider, among other things, whether:
- you want to remain in your home
- you are healthy enough to continue living in your home
- other alternatives, such as selling your home and purchasing a smaller, less expensive home, would be better for you
- your children, or other heirs, want to inherit the home
- the loan proceeds will be enough, with any other source of income you have, will be enough to enable you to live in your home
This is not an exclusive list of topics to consider, and everyone’s situation is unique. It is important for you to weigh whether a reverse mortgage is right for your situation and, you should consult with a legal or financial advisor or a housing counselor to help you assess your options.
A list of New York non-profit housing counseling agencies is available.
What are the differences between a 280, 280-a, 280-b and HECM reverse mortgage?
In New York, there are two types of reverse mortgage loans available to senior borrowers. The first, referred to as a HECM reverse mortgage (or 280-b), is a mortgage loan that is made in accordance with the requirements of the Home Equity Conversion Mortgage program operated by the Federal Housing Administration. HECMs are the only reverse mortgages insured by the Federal Government. The second, referred to as a proprietary reverse mortgage, is a mortgage loan that is made in accordance with the requirements of New York’s Real Property Law Section 280, or 280-a. Part 79 applies to both proprietary and HECM reverse mortgage loans.
The most important distinction between a HECM and proprietary reverse mortgage concerns the maximum loan amount available under each type of loan. Under the HECM program, the maximum loan amount is capped. Proprietary reverse mortgages, on the other hand, do not have a cap. It is for this reason that they are often referred to as “jumbo” reverse mortgages.
Am I eligible for a reverse mortgage?
In order to be eligible for a reverse mortgage, typically you must:
- Own your home
- Be at least 60 years of age (as stated above, certain types of reverse mortgages have a higher age requirement)
- Live in your home for more than half of the year
- Have a single-family home, a 1- to 4-unit building or a federally-approved condominium or planned unit development (currently, cooperative homeowners are not eligible for a reverse mortgage in New York State)
- Have no liens on your home or qualify for a large enough cash advance from the reverse mortgage to pay off any existing liens
- If your home needs physical repairs to qualify for a reverse mortgage, qualify for a large enough cash advance from the reverse mortgage to pay for the cost of repairs
How much money will I receive from a reverse mortgage?
The amount of the mortgage will depend on the type of reverse mortgage, the age of the borrower, the value of the home and current interest rates. In general, the loan amount will be bigger if the homeowner is older, the value of the house higher or the interest rates are lower.
How will I receive my money?
Reverse mortgage proceeds can be distributed in a variety of ways, such as immediate cash advance, line of credit, or monthly cash advance. Not every option will be available to every borrower, so it is important to make sure you understand your options by talking to your lender and an attorney or housing counselor.
What does it cost to apply for a reverse mortgage?
Before closing on a proprietary reverse mortgage under New York’s Real Property Law Section 280 or 280-a, the only charges a lender may collect from a borrower before closing are an application fee, an appraisal fee, and a credit report fee. That application fee must be designated as such and may not be a percentage of the principal amount of the reverse mortgage or of the amount financed. For a HECM loan, there generally is no separate application fee as that fee is include in the origination fee collected at closing.
What is shared appreciation and equity participation?
In exchange for a lower interest rate the lender and the borrower may agree to “equity participation.” Participation mortgages are so named because the lender “participates,” or has the right to a share in any increase in the value of your home.
A Shared Appreciation Mortgage (SAM) takes into account the appreciation in value of the house between the time the loan is signed and the end of the loan term. The lender receives an agreed-to percentage of the appreciated value of the loan when the loan is terminated.
What type of financial institutions does Part 79 apply to?
Part 79 applies both to those organizations required to be licensed by the Department as a mortgage banker and those organizations exempt from licensing as a mortgage banker under Article 12-D of New York’s Banking Law.
I currently have a mortgage on my home, can I still get a reverse mortgage?
Yes, although any reverse mortgage lender will require that the proceeds from a reverse mortgage will first go to pay off the balance of your existing mortgage. As such, an existing mortgage will limit the amount of the net loan proceeds you will receive under a reverse mortgage. When considering whether a reverse mortgage is right for you, it is important to discuss with a housing counselor whether the net loan proceeds will be enough to enable you to live in your house. A list of New York non-profit housing counseling agencies is available.
Who pays my property insurance and taxes after I get a reverse mortgage?
As the homeowner, you will still be responsible for maintaining your property insurance and taxes. This may be different than a traditional mortgage you have had in the past, for which property insurance and taxes are often included in the monthly payment and are remitted by your servicer. However, based on the results of a financial fitness test, you may be required to have a set-aside account (created and maintained by your lender) containing proceeds from your reverse mortgage that have been set aside for payment of your property insurance and taxes. If this is the case, you should be notified by your lender and your lender would be responsible for ensuring that timely payments are made toward your property insurance and taxes.
Is it true that as long as I am alive the bank cannot take my home?
No. While death of the borrower is the most well-known potential trigger for foreclosure of a reverse mortgage, others do exist. Some common events that typically would trigger a default and potential foreclosure pursuant to New York law and regulations, include, but are not limited to:
- Failure to pay property taxes
- Failure to pay property insurance
- Sale of the property
- Failure to use the property as your principal place of residence for any 365 day period without notifying the mortgagee of an anticipated date of return and making arrangements satisfactory to mortgagee for the maintenance of the real property or in excess of 180 nonconsecutive days.
- A bankruptcy filing
Any event that would trigger a foreclosure of your reverse mortgage must be stated in your loan documents and as part of the disclosure provided to you by your lender before you close your loan. In addition, [3 NYCRR Part 79.7 requires the lender to provide you with written notification of the occurrence of an event that would trigger termination of your reverse mortgage loan. Additional information on the foreclosure triggers for a HECM loan are available by visiting the website for the Department of Housing and Urban Development or its HECM website.
Do I have to complete in-person counseling in order to get a reverse mortgage and how do I locate a free housing counselor in my area?
The answer depends on the type of reverse mortgage loan for which you are applying. In New York, in order to get a proprietary reverse mortgage loan (made in accordance with New York Real Property Law Section 280 or 280-a), the borrower must either complete in-person counseling or waive such requirement in writing. In order to get a HECM reverse mortgage loan (made in accordance with the HECM program and New York Real Property Law Section 280-b), a borrower may not waive the counseling requirements but he or she may opt to complete the required counseling either in person or over the telephone. You can find a list of non-profit housing counselors on the Department’s website.
My lender told me I would have to complete repairs to my home before they will give me a reverse mortgage, should I do it?
Sometimes a lender will include certain repair and/or maintenance provisions in the terms of a reverse mortgage. This is because, for the majority of reverse mortgages, the loan is secured by the value of the home. As such, a lender is within their rights to require a consumer to make certain repairs as a prerequisite to obtaining a reverse mortgage. In addition, after a reverse mortgage is made, a lender may require a borrower to maintain the home through ongoing repairs. If a borrower is unwilling or unable to complete such repairs, a lender may arrange for such repairs and pay for it with loan proceeds.
What is private mortgage insurance (PMI) and how will it affect my reverse mortgage?
Private mortgage insurance or PMI is an insurance policy taken out and paid for by a borrower for the benefit of the lender. Whether the reverse mortgage loan is made in accordance with the HECM program (and insured by the Federal government) or New York Real Property Section 280 or 280-a (and insured by a private insurance company), it is likely that an additional monthly amount will be added to the balance of your reverse mortgage to cover the cost of the PMI. It is important that you discuss the financial impact of PMI with your lender and a housing counselor or attorney before getting a reverse mortgage.
My will states that my home goes to my daughter when I die, what effect will taking out a reverse mortgage have on that provision?
A reverse mortgage will become due upon the death of the last borrower. Your daughter (or other heirs) will be given an opportunity to pay of the balance of the reverse mortgage. However, if the balance of the loan is not paid off, the property will go into foreclosure and eventually be auctioned off. The proceeds of the auction will go toward paying off the loan balance. New York is a “non-recourse” state, which means that even if the proceeds from the sale of the home do not cover the loan balance, your lender cannot go after you or your estate for the remaining loan balance. If, on the other hand, there is money left over after the loan is paid off, your heirs will be given an opportunity to claim the surplus.
I have a reverse mortgage and I no longer wish to live in my home, what should I do?
Living in the mortgaged property as your primary residence is a condition of any reverse mortgage loan. If you no longer wish to live in your home or doing so is no longer possible, you should speak to your lender/servicer as soon as possible to discuss your options. You should also speak to an attorney or housing counselor. To locate a free housing counselor in your area, please visit the Department’s website.
What fees can my lender charge me?
With respect to reverse mortgages under New York’s Real Property Law sections 280, or 280-a, lenders may only charge those fees authorized by the Department in Part 79.8. All costs and fees must be fully disclosed and reasonably related to the services provided to or performed on behalf of the consumer. Specifically, a lender may charge the following fees, among others, in association with a reverse mortgage loan:
- An application fee
- An appraisal fee
- A credit report fee
- A loan origination fee
- Closing fees
- Attorney’s fees
- Fees associated with the purchase of mortgage insurance
- A termination or maturity fee
- An application fee, credit report fee and appraisal fee may be charged at the time that an application is submitted for a reverse mortgage loan under New York’s Real Property Law sections 280, or 280-b. All other fees may only be charged at the time that a loan is closed.
Origination fees on a HECM loan are capped. As of July 31, 2020, the total amount of permissible origination fees on a HECM loan are capped at $6,000. For the current cap, and a list of the fees that may be charged in connection with the origination of a HECM loan, you should visit: https://www.hud.gov/program_offices/housing/sfh/hecm/hecmhome.
What is an eligible surviving non-mortgagor spouse and what rights do such persons have?
An eligible non-mortgagor spouse is someone who is not a borrower on a mortgage loan but who is entitled to certain protections under the law. In order to qualify as an Eligible Surviving Non-Mortgagor Spouse, you must not be a borrower on the reverse mortgage and, at the time of the closing of the reverse mortgage (and until the death of the borrower), you:
- were married to the borrower
- met the requirements of the subject reverse mortgage
- resided in the property
If an eligible surviving non-mortgagor spouse lives at the property at the time of the death of the borrower, and is able to obtain, within 90 calendar days following the death of the borrower, good – marketable title to the property, the lender/servicer must notify them of its intent to terminate the loan and allow the eligible surviving non-mortgagor spouse 120 calendar days to satisfy the terms of the reverse mortgage loan and retain the subject property for the lesser of the unpaid principal balance or 95% of the property’s appraised value.
Is the government associated with my reverse mortgage in any way?
The Federal government acts as the insurer for every reverse mortgage loan made in accordance with the HECM program. However, it is important to understand that the insurance being offered by the Federal government in relation to a HECM reverse mortgage loan is for the benefit of your lender and not you. No state or federal government agency is not involved in proprietary reverse mortgage loans made pursuant to New York’s Real Property Law Section 280 or 280-a.
I have a line of credit, when can my lender start to charge interest on the funds?
Interest is not permitted to be charged on reverse mortgage proceeds until such funds are drawn from a borrower’s line of credit. If you believe your lender or servicer has incorrectly charged interest on your line of credit, please file a complaint on the Department’s website.
I signed a commitment with my lender to take out a reverse mortgage--do I have to move forward with the loan?
No, under New York law and regulations, a consumer has 3 days after signing a commitment on a reverse mortgage loan to cancel. However, a consumer that chooses to cancel and not proceed with a reverse mortgage may still be responsible for any fees already paid to a third-party service provider.
My lender asked me to elect a third-party authorized designee, but I don’t have anyone that I can elect. What are my options?
Under New York Real Property Law, a reverse mortgage borrower has the right to elect a third-party as an authorized designee to whom their lender or servicer is obligated to send written notice of any event that could lead to termination of the reverse mortgage loan. If a borrower fails to elect an authorized designee, New York law dictates that written notice of any event that could lead to termination of the reverse mortgage should be sent to the local or county office for the aging.
My lender told me that I am required to escrow my property taxes and insurance in a set-aside account with them. Do I have to?
Under New York law and regulations, the question of whether or not a borrower may be required to escrow property taxes and insurance payments in a set-aside account is determined based on the result of a financial fitness test. If the results of the financial fitness test indicate the need for a set-aside account, a lender is required to establish such an account and ensure timely payment of a borrower’s property taxes and insurance.
What disclosures am I entitled to receive when I get a reverse mortgage?
New York law and regulations require that lenders make a number of disclosures to anyone who obtains a reverse mortgage loan. At the time that you apply for a reverse mortgage, the lender must give you a statement prepared by the local or county office for the aging on available independent counseling and information services. Before closing, your lender must provide you with detailed information about the terms and conditions of your loan, including:
- The interest rate to be charged and whether it is fixed, variable or both
- Interest accrues from the time monies are advanced to you and the interest is compounded
- All fees, costs and payments that must be paid by you
- A description of any refinancing features that you may have discussed
- Any events that could terminate the reverse mortgage
- A description of any shared appreciation or equity participation features
- A toll-free telephone number and the name of a person who can answer any questions, comments or complaints that you may have. If there is no toll-free telephone number, they must accept collect calls
What is a Jumbo Reverse Mortgage and why have I heard that you can’t get one in New York?
The term “Jumbo Reverse Mortgage” is used to refer to a reverse mortgage that allows a borrower to borrow more than the maximum amount allowable under the HECM program. In New York, such a reverse mortgage is called a proprietary reverse mortgage and is made pursuant to New York Real Property Law Section 280 or 280-a. It is important to note that, although proprietary reverse mortgage loans are allowed in New York, lenders are not required to offer them. Some lenders may prefer HECM reverse mortgage loans, as they are insured by the Federal government and so are less risky to the lender.