What Is A Reverse Mortgage And Can You Sell A House In New York With One?

Can you sell a house with a reverse mortgage? Depending on your living situation in New York, you may want to learn more. You don’t want to start that conversation without knowing what terms such as Home Equity Conversion Mortgage (HECM) and “appraised value” means. And if you are a homeowner with a reverse mortgage already, you might be wondering if it’s even possible to sell a house with one already.

Below you’ll find a guide to walk you through all of the important and critical details so that you’ll be able to confidently understand how to speak with a reverse mortgage lender when discussing the possibilities. And if you already have a HECM loan, you can now move forward to discuss potentially selling your house in New York. 

What Is A Reverse Mortgage And Can You Sell A House In New York With One?

Man Holding Reverse Mortgage Form on table

What is a Reverse Mortgage

A reserve mortgage, otherwise known as a home equity conversion mortgage (or HECM loan), gives homeowners aged 62 or older the ability to convert the equity in their current house into tax-free income without needing to sell the home or give over the title to a lender. Whereas a traditional mortgage requires the homeowners to make monthly payments to a bank or lender, the reverse mortgage loan literally turns that process around. The reverse mortgage lender ends up making payments to the owner following a down payment. The loan itself is backed by the equity you’ve already put into the house. 

The idea is that you can take the equity that you have in your property and turn it into cash that you can use now. What you do with it is up to you. Many people will use the money from a reverse mortgage to take vacations, buy a car, make upgrades to their home, or generally live off the money. You can even reinvest the money from a reverse mortgage and turn it into an extra form of income to supplement retirement funds and Social Security. 

The amount that a homeowner can receive in a reverse mortgage depends on a few different factors, including the age of the borrower or borrowers, the appraised value of the property, current interest rates, and any government-imposed lending limits. Homeowners 62 and older with more valuable homes often qualify for higher reverse payments, assuming they don’t owe a large sum on the house. 

As for how homeowners can get the money from a reverse mortgage lender, they have a few options. They can take the money as a lump sum, as a fixed monthly payment, or as a combination. Owners do have to pay interest on the proceeds they receive, but only that. 

How does a Reverse Mortgage Work

When a homeowner is interested in getting a reverse mortgage, the process is actually fairly simple but there are specific requirements.

Any borrower looking for a reverse mortgage needs to be at least 62 years old. If it’s a married couple and one person isn’t 62, it doesn’t matter so long as the lead borrower meets that criteria. Anyone who potentially wants to get a reverse mortgage will need to take a home counseling session in order to make sure they completely understand the pros, cons, risks, and potential wrapped up in a reverse mortgage. 

The property in question must be a primary residence. You can’t get a home equity conversion mortgage on a vacation home or investment property. If you’re unclear on what that means, it’s that you need to live in the property you want to get a reverse mortgage on for over six months in a calendar year. 

In most cases, you won’t be able to borrow over 80% of the house’s value. The FHA’s maximum value on a HECM loan in 2019 was $726,525. However, the rule of thumb is usually that the older you are, the more you’ll be able to borrow. Some lenders will tell you that the percentage you can borrow against your home is usually your age minus 12. So if you’re 75 years old, you’re likely to be able to borrow up to 63% of your home’s value. 

While a reverse mortgage means that, after your down payment, you are not required to make any other monthly mortgage payments again, you are still responsible for property taxes, homeowners’ insurance, general care of the house, and any mortgage insurance premiums. Your reverse mortgage lender will help you to understand if you have the ability to make the necessary payments depending on your income and retirement funds. You may end up putting aside some of the equity from the HECM loan in order to pay some of those expenses. 

One thing you’ll want to understand about a reverse mortgage is that it is known as a negative amortization loan, which means the balance on the loan grows the longer it goes. So if you borrow $150,000 as a HECM loan, and pass away or decide to sell the house, there will likely be a balance left on the mortgage, which can depend on interest rates. So when you either pass away or sell the house, the lender now has that extra equity in the property. 

So how do you get your reverse mortgage payment from the lender? There are a few different ways to go about it.

Lump-Sum

In a lump sum arrangement, you take the cash from the lender upfront. However, you can’t just take it all at once. You are required to split it into two sum payments. The first payment you get upon signing the mortgage and the second payment you get a year later. Often, a lump sum HECM loan will also come with a fixed interest rate on the balance. 

Tenure Payment

If you would prefer to receive your home equity conversion mortgage in a series of monthly payments, you can do that for the duration of the time you live in the home. This kind of reverse mortgage will usually come with an adjustable interest rate, so that’s worth remembering.

Term Payment

If you don’t want your payments to be monthly for years, but you also don’t need the money to arrive all at once, you can set up a term payment plan, which means you’ll receive your HECM loan money monthly for a fixed period of time. The interest rate for these kinds of payments is often adjustable. 

Credit Line

If you don’t feel as though you need the cash on hand, you can transfer the equity of your house into a credit line. You can draw on this credit anytime you want and the credit line also grows over time thanks to an adjustable interest rate. However, if cash is tight, this might not be the way to go.

Mix & Match Payments

If you like aspects of certain payment options, you can always mix and match them as well. You might take a large chunk of money upfront as a lump sum but then also set up monthly term payments. Your reasons for mixing and matching will depend on your living situation, current needs, and cash availability. If you do decide to change the plan at a later date, you’ll likely have to pay an administration fee. 

Reverse Mortgage Process

If you plan on getting a reverse mortgage, there may some unique wrinkles based on your specific situation, but the process remains generally the same.

First, the borrower needs to decide what they want to accomplish financially in retirement or later in life. Since they need to be 62 or older, they need to understand what a HECM loan can provide for them and why they would want to get one. If you want to downsize or take more vacations, you’ll want to consider all of that.

Next, the borrower meets with a reverse mortgage lender to find out if they meet the requirements and fill out their loan paperwork. The application usually takes around 45 days to process, though it varies based on lenders. The borrower will also need to meet a third-party counseling agency that is approved by the Department of Housing and Urban Development (HUD).

Once the loan is approved, the borrower and lender agree on how to disburse the equity using the aforementioned options. And that’s it! The homeowner now has a reverse mortgage and the flexibility that comes with it. 

Pros & Cons

As with any financial offering, there are pros and cons to consider with a reverse mortgage. 

One of the biggest pros is that you can get the equity from the home in the form of cash but still have the ability to sell your house. Leave the Keys Homebuyers buys New York homes with reverse mortgages and we pay in cash, even during quarantine! One of the biggest pros for reverse mortgages is that if you sell your house with one there is no penalty for an early home sale. 

Pros Cons
Selling Your Home Anytime You Want The reverse mortgage process can be a confusing one.
No Penalty for Early Home Sale Working with a lender can be strenuous
Once the balance is paid off, you keep any excess proceeds. Real Estate Attorney Fees Can Quickly Rise
Only owe 95% of appraised value or reverse loan balance Can struggle to pay the cost of sale if you owe more than the home is worth.
Frees up cash for you do take vacations, make upgrades, or spend money on grandkids. The non-borrowing spouse may not be able to stay in the house after the borrower passes away.
Reinvest the extra funds as supplemental income. Your house can still be taken away via foreclosure.

man selling his house with a reverse mortgage to a home buyer

Conclusion paragraph

Reverse mortgages can be extremely helpful for older homeowners looking to downsize or add extra cash to their retirement. But there are a lot of hoops to jump through and potential downsides as well. So it’s important to consider all the facts before jumping into one. Consider reaching out to Leave the Keys Homebuyers to see if we can offer you a quicker and easier solution. You’ll get cash for your New York home and you won’t have to deal with lenders!