How do I receive the money from a reverse mortgage loan?
This depends on the type of loan, the lender you choose, and the payment option that you select.
Most reverse mortgages today are insured by the Federal Housing Administration (FHA) as part of its Home Equity Conversion Mortgage (HECM) program. With a HECM loan, you can receive your money in one of 3 ways: as a line of credit, in monthly installments, or a lump sum. You can also get a combination of monthly installments and a line of credit.
As of October 1, 2013, there is a cap on the amount you can take out in the first year. Your lender will calculate for you how much you are authorized to borrow overall, based on your age, the interest rate, and the value of your home. This number is known as your initial principal limit.
Generally, you can take out up to 60% of your initial principal limit in the first year. However, if the amount you owe on an existing mortgage (or other required payments) is more than 60% of your initial principal limit, you can take out enough to pay off your mortgage (and any other required payments, including upfront loan fees) plus additional cash of up to 10% of your initial principal limit. This first-year withdrawal cap applies to all 3 payout options.
The line of credit option allows you to draw on your loan at the times and amounts that you choose (subject to the first-year cap and the overall initial principal limit). You will only be charged interest on the amount of money you take out. You will not be charged interest on the money remaining in your credit line, which you can take out at a later date.
This option also features credit line growth. With a line of credit, the amount that you can borrow will increase over time. The growth applies to the unused funds remaining in your credit line. The less you take out upfront, the more you will be able to borrow later. As long as you continue to meet the requirements of your reverse mortgage, your credit line cannot be frozen or canceled.
The monthly “tenure” option allows you to receive a monthly payout from your lender for as long as you continue to live in your home.
The monthly “term” plan is a similar option, but you only receive the monthly payout for a fixed number of years. The payouts will be larger than under the “tenure” option, and you get to choose how many years you would like.
You can combine a line of credit with either the monthly tenure or monthly term payouts. The line of credit, monthly payouts, and combination options are only available with an adjustable rate loan.
With the fixed-rate, lump-sum option, you will receive your entire loan proceeds upfront and you will receive a fixed interest rate. However, you will only be able to access the amount permitted under the first-year withdrawal limits. The remaining loan amount is forfeited. This means most borrowers will not be able to borrow as much with a fixed-rate, lump-sum loan than with an adjustable-rate, line of credit or monthly payout option.
Once you have selected a payout option, you may be able to change it for a fee – as long as you haven’t drawn all of your funds already.
Some lenders may offer a proprietary (non-FHA insured) reverse mortgage. If you are considering a proprietary reverse mortgage, make sure you understand your options for receiving your money, as they may differ from the options for HECM loans.