Trying to Determine if the Reverse Mortgage is Right for Me

Question and Answer Session

The Question: If we choose the lump-sum payout but only draw half of the 60%… I take it the remaining (40%) equality is forfeit, regardless of what amount we draw upon closure? 

2nd: On a Lump-Sum payment are any of the amounts drawn accruing interest during the tenure of the loan or is that paid upfront upon the closure of the loan when that amount or later amounts are drawn?

The Answer: Your numbers will be affected by your wife’s age, interest rates and any liens you have on the home. And you only accrue interest on the funds you borrow, from the time you borrow them.

Firstly, since your wife is not yet 62, she will be the eligible non-borrowing spouse and can live in the home even after you pass no matter which option you choose, and the amount of the reverse mortgage proceeds will be determined by her age.

Because she is not a borrower on the loan, she would not have access to any funds remaining on the line of credit (assuming you could not take all the funds at closing or in the first year) if something happened to you and she was still remaining in the home even though she could still live in the home for life if that was the decision you ultimately made.

Your first premise of 60% of the home value is not correct, especially since HUD (Department of Housing and Urban Development) changed the program last October and since your spouse is not yet 62 years of age. The interest rate now has much more impact on the amount of money borrowers receive than before the HUD changes.

For instance, for a 64-year-old borrower, the Principal Limit is about 48.3% at 4% and 45.2% at 4.5% interest. But when you add a non-borrowing spouse aged 59 into the equation, the Principal Limit will go to $44,300 and $41,100 at those interest rates.

The amount available to you under any of the options at closing or in the first 12 months would depend on the amount you owed (if any) on the home now in current mortgages and liens or what HUD deems “mandatory obligations”.

If you don’t owe anything on the home, HUD will only allow you up to 60% of one of the percentages above at closing or in the first 12 months. If you choose the fixed rate option, you must take the full draw at closing, and it is a single-draw option which means that there are no further draws available.

Also, if you choose the fixed-rate option, the fact that you have a non-borrowing spouse does lower the total funds available to you, but other than that, there are no other real repercussions because you have already taken all the funds available to you at the close and there are no other funds available to you or your spouse later.

The non-borrowing spouse cannot lose access to any additional funds, even if something were to happen to you because there are no additional funds available to lose. You are accruing interest on the total funds you draw though whether you can use them all from the start or not.

If you choose the line of credit option because you do not have an existing loan to pay off, you can take up to 60% of your Principal Limit at close or any time in the first year and then after 12 months, the remaining 40% becomes available to you.

Now there are some exceptions to this rule. HUD will let you take up to 10% cash in your pocket not to exceed your total Principal Limit if the mandatory obligations (existing loans and costs) exceed the 60% first-year limitation.

For example, if your current mortgages and cost to get the loan total 62% of your eligible Principal Limit rather than saying you can’t have any money at close because you are already over the 60% that HUD limits borrowers to in the first year, HUD will allow you 10% of the Principal Limit (not your home value but the lending amount that HUD has agreed to lend on your home).

So if your total Principal Limit is $150,000 and you fall into this category, HUD will allow the lender to pay off your existing loans and the costs to get the reverse mortgage plus you can take up to $15,000 at close or in the first year and then must wait until after 12 months to access any additional funds available to you. 

It would be these additional funds to which the non-borrowing spouse would not have access if something happened to the borrowing spouse. You do not accrue any interest on any funds you do not borrow, only on the funds you use.

So if the non-borrowing spouse has funds on the line that she never borrowed, she or your heirs if she keeps the loan until she passes, would never have to repay this amount and would never have accrued any interest on this portion of the line.

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