Reverse Mortgages: How They Work on Cape Cod
Owning a home on Cape Cod can give you valuable equity, but deciding how to use that equity without selling can feel confusing. A reverse mortgage lets an eligible homeowner borrow against home equity without required monthly principal and interest payments, as long as the loan obligations are met. In this guide, I will go over how reverse mortgages work, what the homeowner must continue paying, and what to expect during the process.
Key Takeaways
- Purpose: A reverse mortgage allows an eligible homeowner to access part of the equity in a primary residence.
- Monthly Payments: Monthly principal and interest payments are generally not required, but interest and loan charges are added to the balance.
- Responsibilities: The homeowner must continue paying property taxes, homeowners insurance, and applicable association charges while maintaining the home.
- Timeline: The process often takes several weeks and includes counseling, an application, an appraisal, underwriting, and closing.
- Best For: It may be useful for eligible homeowners who want to remain in their primary residence and use available home equity.
Quick Answers About Reverse Mortgages
- Do I keep ownership of my home? Yes. You keep title to the home, subject to the reverse mortgage lien.
- Can a reverse mortgage pay off my current mortgage? Yes, if enough proceeds are available. The existing mortgage must normally be paid off at closing.
- How can I receive the money? Depending on the program, proceeds may be available as a lump sum, monthly advances, a line of credit, or a combination.
- Are reverse mortgage proceeds taxable income? Loan proceeds are generally not treated as taxable income, but you should confirm your situation with a qualified tax professional.
I am Mike Burton (NMLS# 3373), Mortgage Broker/Owner at Slade Mortgage Group. After 40 years in the mortgage business, I still enjoy seeing the relief people feel when a financial situation is explained in a way that feels comfortable and easy to follow.
What Is a Reverse Mortgage?
A reverse mortgage is a loan secured by your home. Instead of making required monthly principal and interest payments to the lender, you receive available loan proceeds based on the program and your situation.
The loan balance normally grows over time because interest and certain charges are added to the amount borrowed. You still own the home. You also remain responsible for the property and for meeting the terms of the loan.
The most common reverse mortgage is the Home Equity Conversion Mortgage, also called a HECM. A HECM is insured by the Federal Housing Administration. There are also proprietary reverse mortgage programs with different loan amounts, property requirements, and eligibility guidelines.
Ok, here is how the program works. The lender looks at the home, the available equity, the age of the youngest eligible borrower, current market rates, and the program guidelines. These items help determine how much may be available.
Who May Qualify for a Reverse Mortgage?
For a HECM, at least one borrower generally must be age 62 or older. The home must usually be the borrower’s primary residence, and the property must meet the program’s requirements.
The lender will also complete a financial assessment. This review helps determine whether the homeowner appears able and willing to keep up with property-related obligations.
Common items reviewed include:
- Income and available financial resources
- Credit and payment history
- Property tax and homeowners insurance history
- Existing mortgage and lien balances
- The condition and appraised value of the home
- Whether the property is the borrower’s primary residence
A reverse mortgage is not based only on how much equity you have. The property, the borrower, and the financial assessment all need to meet current guidelines. Requirements can change, so each situation should be reviewed using the current program information.
How Much Money Can a Homeowner Receive?
The available reverse mortgage proceeds depend on several factors and are not equal to all of the equity in the home. The calculation commonly includes the appraised value, applicable lending limits, current rates, the age of the youngest eligible borrower, and existing liens.
If you have a current mortgage, that loan generally needs to be paid off with the reverse mortgage proceeds. Closing costs and any required set-aside may also reduce the amount available to you.
For example, two Cape Cod homeowners with homes of similar value may receive different available proceeds. One may have a larger existing mortgage. The other may have no mortgage but may need funds set aside for future property charges. This is 1 example, we have many options to choose from.
How Reverse Mortgage Proceeds Can Be Received
The way proceeds are received depends on the reverse mortgage program and whether the interest rate is fixed or adjustable. Options may include:
- Lump sum: Available proceeds are taken at closing, subject to program limits.
- Line of credit: Funds are accessed as needed while they remain available.
- Monthly advances: A set amount may be sent each month under the selected plan.
- Combination: Some programs allow a mix of available payment choices.
It is important to look at more than the amount available on the first day. We should also talk about how you plan to use the money, how long you expect to stay in the home, and how the loan balance may change.
What Does the Homeowner Continue to Pay?
A reverse mortgage removes the requirement for monthly principal and interest payments. It does not remove the other costs of owning a home.
The homeowner must generally continue to:
- Pay property taxes on time
- Maintain required homeowners and flood insurance
- Pay condominium or homeowners association charges, when applicable
- Keep the property in reasonable condition
- Use the home as a primary residence
- Follow the other terms of the loan
This is especially important on Cape Cod and the Islands. Coastal properties may have additional insurance considerations. The lender may require flood insurance when the property is located in an applicable flood zone, and insurance availability and cost should be reviewed early.
If the financial assessment shows concern about future property charges, part of the proceeds may need to be placed in a set-aside. The lender then uses those funds toward certain property expenses. Whether a set-aside is required depends on the full application.
When Does a Reverse Mortgage Become Due?
A reverse mortgage generally becomes due when the last borrower sells the home, permanently moves out, or dies. It can also become due if important loan obligations are not met, including the payment of property taxes or required insurance.
When the loan becomes due, the homeowner or the estate usually has choices. The home may be sold and the loan repaid from the sale proceeds. The borrower or heirs may also be able to repay the balance and keep the property.
HECM loans have non-recourse protections. Generally, neither the borrower nor the estate is required to pay more than the applicable value of the home when the loan is repaid through a sale that follows program requirements. The details should be reviewed carefully with the servicer when the loan becomes due.
Reverse Mortgage vs. Other Equity Options
A reverse mortgage is one way to use home equity. It is not the only way. A traditional mortgage, home equity loan, or HELOC home loan may make more sense when the homeowner is comfortable making monthly payments.
| Option | Monthly Payment | Main Consideration |
|---|---|---|
| Reverse mortgage | No required monthly principal and interest payment | Loan balance normally increases over time |
| Home equity loan | Monthly principal and interest payment | Usually provides a lump sum with repayment beginning right away |
| HELOC | Required payments vary by balance and loan terms | Rate and payment may change on an adjustable-rate line |
| Sell the home | No new mortgage is required unless another property is purchased | Requires moving and paying applicable selling expenses |
Each option has a different effect on monthly cash flow, available equity, and long-term plans. You can also review other mortgage loan options before deciding which direction fits your situation.
Can a Cape Cod Second Home Use a Reverse Mortgage?
A HECM generally requires the property to be your primary residence. A Cape Cod home used only as a vacation property or second home would not normally meet that occupancy requirement.
If you own more than one property, the details matter. The lender will look at where you live for most of the year and whether you meet the program’s occupancy certification. Please don’t hesitate to ask questions about this. It is better to review occupancy early than find a problem later in the process.
The Reverse Mortgage Process Step by Step
1. Review Your Goals
We start by talking about what you are trying to do. You may want to pay off an existing mortgage, create access to funds, or improve monthly cash flow. The reason matters because it helps us compare the available choices.
2. Complete Required Counseling
HECM applicants must generally complete counseling with an approved independent counselor. The counselor explains the program, costs, alternatives, and homeowner responsibilities.
3. Submit the Application
The application normally includes identification, income and asset information, property information, insurance details, and current mortgage statements. Additional documents may be requested depending on the scenario.
4. Complete the Appraisal
An approved appraiser evaluates the property and provides an opinion of value. The appraisal may also identify repairs that need to be completed under program rules.
5. Underwriting Review
The lender reviews the borrower, property, appraisal, title, insurance, and financial assessment. Some files are simple. Others take more time because of trusts, property repairs, insurance questions, or existing liens.
6. Closing and Funding
Once the loan is approved and the final terms are accepted, closing documents are signed. Funding timing depends on the transaction and applicable rescission rules.
The full process often takes several weeks, but timing varies. Appraisal availability, title issues, property condition, and document collection can all affect the schedule.
Costs and Questions to Consider
Reverse mortgage costs may include an origination charge, appraisal, title work, recording charges, mortgage insurance for a HECM, and other third-party expenses. Some costs may be financed into the loan, which reduces the equity remaining in the property.
Rates, fees, and requirements change. Before moving ahead, ask:
- How much will be available after paying existing liens and closing costs?
- Will any funds need to be placed in a set-aside?
- How is interest added to the balance?
- What happens if I move out of the home?
- How could this affect the equity left for my estate?
- Are there other loan options with a required monthly payment that should be compared?
The information may take some time to settle in. No worries, I am happy to go over it again. The main idea is to have you comfortable with the program before you decide which direction you will go in.
Let’s Review Your Cape Cod Home and Options
If you are considering a reverse mortgage in Cape Cod, Barnstable County, Plymouth County, the South Shore, or the Boston Area, I am happy to review the general program with you. We can look at the property, current mortgage balance, estimated equity, and what you are trying to accomplish.
Call, text, or email Slade Mortgage Group and we can compare the options and go over the next steps. There is no need to rush through the information. We will do this together.
Frequently Asked Questions
Can I get a reverse mortgage on a condominium?
A condominium may qualify if the property and project meet the applicable program requirements. Approval can depend on the reverse mortgage type, condominium documentation, insurance, and current eligibility guidelines.
What happens if the appraisal is lower than expected?
A lower appraised value may reduce the proceeds available from the reverse mortgage. If the proceeds are not enough to pay required liens and costs, the homeowner may need to bring in funds or consider another option.
Can I make voluntary payments on a reverse mortgage?
Yes, reverse mortgages generally allow voluntary payments without requiring a regular monthly principal and interest payment. A homeowner may choose to pay interest, reduce the balance, or repay the loan, subject to the loan terms.
What happens when one reverse mortgage borrower dies?
If another eligible borrower remains in the home and continues meeting the loan obligations, the loan generally does not become due only because one borrower died. Non-borrowing spouse rules are more specific and should be reviewed before closing.
Can a reverse mortgage be refinanced later?
A reverse mortgage may be refinanced if the homeowner and property meet current guidelines and the new loan provides a meaningful benefit. Closing costs, available proceeds, current rates, and the new loan balance should all be reviewed.
This is educational and not financial advice. Loan programs and guidelines can change. Talk with a licensed mortgage professional about your specific scenario.
Mike Burton
Mike has over 33 years in the mortgage industry as a top originator for each institution he was employed with. Mike started Slade Mortgage Group in 1997 and formed a team of professionals to service clients by beating the banks.
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