With a reverse mortgage, you always retain title to or ownership of your home. The lender never, at any point, owns the home even after the last surviving spouse permanently vacates the property.
The amount of funds you receive depends on the age of the youngest borrower, the value of the home, the interest rate and upfront costs. The older you are, the more proceeds you can receive.
There is a limit on the amount of money that can be withdrawn in the first year. If you are eligible to withdraw $100,000, for example, you would be allowed to get only $60,000, or 60 percent of that sum, in the first year. There are exceptions. You can withdraw a bit more if you have an existing mortgage, or other liens on the property, exceed the 60 percent limit. You must pay off these "mandatory obligations" as the government calls them, before qualifying for the reverse mortgage. You can withdraw enough to pay off these obligations, plus another 10 percent of the maximum allowable amount -- in which case that's an extra $10,000, or 10 percent of $100,000.
The funds can be delivered to you as a lump sum, as a line of credit or as fixed monthly payments, either for a fixed amount of time or for as long as you remain in the home. You can also combine these options, for example, taking part of the proceeds as a lump sum and leaving the balance in a line of credit.
Fees can be paid out of the loan proceeds. This means you incur very little out-of-pocket expense to get a reverse mortgage. Your only out-of-pocket expense is the appraisal fee and maybe a charge for counseling depending on the counseling organization you work with. Together, these two fees will total a few hundred dollars. Very low-income homeowners are exempted from being charged for counseling.
Your final loan balance is comprised of the amount borrowed, plus annual mortgage insurance premiums, servicing fees and interest. The loan balance grows as you live in the home. In other words, when you sell or leave the house, you owe more than you originally borrowed. Look at it this way: A traditional mortgage is a balloon full of air that loses some air and gets smaller each time you make a payment. A reverse mortgage is an empty balloon that grows larger as time passes.
With a Home Equity Conversion Mortgage or HECM (see Types of Reverse Mortgages), the government insured reverse mortgage option, no matter how large the loan balance, you never have to pay more than the appraised value of the home or the sale price. This feature is referred to as non-recourse. If the loan balance exceeds the appraised value of the home, then the federal government absorbs that loss. The government pays for it with proceeds from its insurance fund, which you as a borrower pay into on a monthly basis.
You are responsible for paying your property taxes, homeowners insurance, condo fees and other financial charges. Any lapse in these policies can trigger a default on your loan. To help reduce future defaults, HUD will require lenders to conduct a financial assessment of all prospective borrowers as of January 13, 2014.
Lenders will analyze all income sources -- including pensions, Social Security, IRAs and 401(k) plans -- as well as your credit history. They will look closely at how much money is left over after paying typical living expenses. If a lender determines that you have sufficient income left over, then you won't have to worry about having any funds set-aside to pay for future tax and insurance payments. If, however, a lender determines that you may not be able to keep up with property taxes and hazard insurance payments, they will be authorized to set-aside a certain amount of funds from your loan to pay future charges.