Reverse Mortgage Guide

Understanding the fundamental concept and mechanics:

What Is a Reverse Mortgage?: A reverse mortgage is a loan that allows homeowners 62+ to borrow against their home equity. Unlike traditional mortgages where you make payments to the lender, with a reverse mortgage, the lender makes payments to you. The loan is repaid when you sell the home, move out permanently, or pass away.

How It Works: 1. You borrow against your home's equity 2. Receive funds as a lump sum, monthly payments, line of credit, or combination 3. Continue living in your home without making monthly mortgage payments 4. Remain responsible for property taxes, insurance, and maintenance 5. Loan balance grows over time with interest and fees 6. Loan is repaid when you leave the home permanently

Types of Reverse Mortgages:

Home Equity Conversion Mortgage (HECM): FHA-insured reverse mortgages, the most common type. Strict requirements and consumer protections. Maximum loan amounts based on FHA limits (currently $1,149,825 in Santa Clarita).

Proprietary Reverse Mortgages: Private loans for homes valued above FHA limits, common in Santa Clarita where many homes exceed $1.1M. Fewer protections but access to more equity.

Single-Purpose Reverse Mortgages: Offered by some nonprofits and government agencies for specific purposes (home repairs, property taxes). Least expensive option but limited availability and use.

Eligibility Requirements: - At least one homeowner must be 62 or older - Must own home outright or have low mortgage balance - Home must be your primary residence - Must maintain the property and stay current on taxes/insurance - Must complete HUD-approved counseling session - Property must meet FHA standards (for HECM)

Reverse mortgages offer several potential advantages:

Supplement Retirement Income: Convert home equity into cash to cover living expenses, healthcare costs, or improve quality of life without selling your home or taking on monthly payment obligations.

No Monthly Mortgage Payments: Unlike traditional mortgages or home equity loans, you make no monthly principal and interest payments. This frees up monthly cash flow for other expenses.

Stay in Your Home: Continue living in your home for as long as you want, provided you maintain it and pay property taxes and insurance.

Flexible Payment Options: - Lump Sum: Receive entire loan amount at closing (fixed rate only) - Monthly Payments: Receive regular payments for a set period or life of loan - Line of Credit: Draw funds as needed; unused portion grows over time - Combination: Mix of lump sum, monthly payments, and credit line

Non-Recourse Protection: You (or your heirs) will never owe more than the home's value when sold, even if the loan balance exceeds the value. FHA insurance covers the difference on HECMs.

Tax Benefits: Loan proceeds are generally not taxable income. Consult a tax advisor about your specific situation.

Retain Home Ownership: You maintain title to your home and can leave it to heirs (though they must repay the loan balance to keep it).

For Santa Clarita Homeowners: With median home values around $800,000-$850,000 and many homes worth significantly more, Santa Clarita seniors often have substantial equity to access.

Important costs and risks to consider:

Upfront Costs (can be financed into loan): - Origination Fee: Up to $6,000 for HECMs, varies for proprietary loans - Mortgage Insurance Premium (MIP): 2% of home value upfront for HECMs - Appraisal Fee: $400-$800 depending on property - Title Insurance & Recording: $1,000-$3,000 - Counseling Fee: Required HUD counseling, typically $125-$200

Ongoing Costs (you must pay these): - Interest: Accrues on loan balance, typically 2-3% above prime rate - Annual MIP: 0.5% of outstanding balance annually (HECMs) - Property Taxes: Must stay current or risk foreclosure - Homeowners Insurance: Must maintain adequate coverage - HOA Fees: Must continue paying (if applicable) - Maintenance: Must keep home in good condition

Risks & Downsides:

Growing Loan Balance: Interest compounds over time, causing balance to grow. In 10-15 years, you may owe significantly more than you borrowed.

Reduced Inheritance: Heirs receive less equity, or none at all if loan balance equals or exceeds home value.

Loss of Home If Obligations Not Met: Failure to pay property taxes, insurance, or maintain the home can trigger foreclosure. This is a common problem for seniors on fixed incomes.

Complexity: Reverse mortgages are complicated financial products. Terms, costs, and implications can be difficult to fully understand.

Impact on Government Benefits: Loan proceeds could affect eligibility for Medicaid or Supplemental Security Income if not spent in the month received.

Fees Can Be High: Total costs can reach 5-6% of home value, significantly more than traditional mortgages.

Limits Access to Equity: Once you have a reverse mortgage, you can't easily access remaining equity through refinancing or home equity loans.

Moving or Selling Considerations: If you need to move to assisted living or sell within a few years, costs may outweigh benefits.

Before getting a reverse mortgage, evaluate other options:

Downsizing: Sell your current home and purchase a smaller, less expensive property. Pocket the equity difference to fund retirement. Reduces maintenance burden and property taxes.

Home Equity Loan or HELOC: Borrow against equity with monthly payments. Better if you can afford payments and want to preserve more equity. Lower costs than reverse mortgages.

Cash-Out Refinance: Refinance existing mortgage for more than you owe, taking difference in cash. Requires monthly payments but more straightforward than reverse mortgages.

Selling and Renting: Liquidate all equity and rent a home. Eliminates property taxes, maintenance, and insurance responsibilities. Provides maximum cash from equity.

Property Tax Postponement: California offers property tax postponement programs for seniors. Allows deferring taxes with state lien on property.

Family Loans: Borrow from family members, potentially with better terms than commercial products. Keep more wealth within the family.

Renting Rooms: Generate income by renting spare bedrooms or ADUs. Provides ongoing income without depleting equity.

Government Assistance: Explore programs like SSI, Medicaid, food assistance, or utility bill support to reduce expenses.

Delay Social Security: If not yet claiming, waiting until 70 maximizes monthly benefits. May provide needed income without tapping home equity.

Thoughtfully evaluate whether a reverse mortgage is right for you:

Good Candidates for Reverse Mortgages: - 62+ with significant home equity - Planning to stay in home for at least 5-7 years - Need supplemental retirement income - Can afford property taxes, insurance, and maintenance - Don't need to leave home equity to heirs - Have no better alternatives for accessing cash - Understand the product and its implications

Poor Candidates for Reverse Mortgages: - Planning to move within a few years - Can't afford property taxes and insurance - Want to leave home to heirs with maximum equity - Have better, less expensive alternatives - Don't fully understand the product - Health issues may require assisted living soon - Have other assets that could be used instead

Questions to Ask Yourself: 1. How long do I plan to stay in this home? 2. Can I afford property taxes, insurance, and maintenance? 3. Do I have other sources of retirement income? 4. How important is leaving my home to my heirs? 5. Have I explored all alternatives? 6. Do I understand all costs and implications? 7. Have I discussed this with family? 8. Could I achieve my goals another way?

Questions to Ask Lenders: 1. What are all upfront and ongoing costs? 2. What interest rate and how is it calculated? 3. What payment option is best for my situation? 4. What are my obligations to keep the loan in good standing? 5. What happens if I need to move to assisted living? 6. How will this affect my heirs? 7. Can you provide detailed scenarios showing loan balance growth? 8. What protections do I have?

Working with Professionals: - HUD-Approved Counselor: Required for HECMs, helps you understand product (find at 800-569-4287) - Financial Advisor: Review your overall financial picture and alternatives - Estate Planning Attorney: Understand implications for your estate and heirs - Tax Professional: Discuss tax implications - Trusted Family Members: Include adult children in discussions if comfortable

Local considerations for Santa Clarita homeowners:

Home Values: Santa Clarita's median home value of $800,000-$850,000 means many homeowners have substantial equity to access. Homes in Valencia, Stevenson Ranch, and established Saugus neighborhoods often exceed $1 million, potentially requiring proprietary reverse mortgages.

Property Taxes: California's Prop 13 keeps property tax increases low for long-time homeowners. However, current taxes must be paid to maintain reverse mortgage. Santa Clarita property taxes average 1.1-1.3% annually.

HOA Considerations: Many Santa Clarita communities have HOAs with monthly fees. These must be paid to stay in good standing. Factor HOA fees into your ability to maintain the home.

Local Lenders: Work with lenders experienced in Santa Clarita's market who understand local home values, HOAs, and community types.

Healthcare Access: Santa Clarita has good healthcare facilities (Henry Mayo Hospital) but limited assisted living options compared to larger cities. Consider how this affects long-term plans.

Climate & Maintenance: Santa Clarita's hot, dry summers can stress HVAC systems and landscaping. Ensure you can afford ongoing maintenance to keep home in good condition per reverse mortgage requirements.

Market Conditions: Strong demand for Santa Clarita homes means good resale potential if heirs choose to sell rather than keep the property.

Local Resources: - Santa Clarita Senior Center: Information and support services - Henry Mayo Hospital: Healthcare and wellness programs - Area Agency on Aging: Counseling and resources - Local HUD-approved counselors for required counseling sessions