Reverse mortgage loans enable Texas homeowners to tap into their home’s equity and boost their retirement fund. In many cases, they can be an excellent financial tool for people over 62 who want to improve their financial stability.
We will explain how a reverse mortgage works, how to qualify for one, some Texas-specific regulations, and different reverse mortgage options.
Differences Between Reverse Mortgage and Regular Mortgage
A traditional mortgage, also known as a regular mortgage, is a loan used to purchase a home. With a traditional mortgage loan, you pay the lender a certain amount of money each month and essentially buy your home in installments.
A reverse mortgage is a loan available to homeowners aged 62 and older that allows them to convert a portion of their home’s equity into cash. With a reverse mortgage, the lender takes a part of your home’s equity (the current market value of your home) and pays you for it in a lump sum, monthly payments, or line of credit.
For a regular mortgage, as you make payments, your loan balance decreases, and your equity in the home increases. You make monthly payments to the lender over a set period, usually 15 to 30 years. These payments cover both the principal (the amount borrowed) and the interest.
In contrast, reverse mortgage borrowers lose equity when they convert a portion of their home’s value into cash. With a reverse mortgage, instead of making payments to the lender, the lender pays you either as a lump sum, monthly payments, or a line of credit. Over time, the loan balance increases due to added interest and fees, which decreases your home equity.
How Reverse Mortgages Work in Texas
A reverse mortgage in Texas works by extracting value from the home you already own without selling it. Your loan balance increases, meaning you owe more with time. However, the balance is only due once you move out, sell the home, or pass away. However, the non-borrowing spouse can remain in the home if they fulfill certain requirements.
You remain the homeowner with the obligation to pay property taxes, homeowners insurance, and other ongoing costs. After the last surviving borrower dies, any remaining equity will be passed on to their heirs.
By getting a reverse mortgage, senior homeowners typically pay for home improvements, medical expenses, fund their grandchildren’s education, or simply get supplement retirement income. It’s important to note that it’s possible to lose a home with a reverse mortgage.
Types of Reverse Mortgages Available in Texas
There are three main types of reverse mortgages in Texas:
- Home equity conversion mortgages
- Single-purpose reverse mortgages
- Proprietary reverse mortgages
The most popular reverse mortgage loan is a home equity conversion mortgage (HECM). It’s insured and controlled by the Federal Housing Administration (FHA) and can only be acquired through an FHA-approved lender.
A HECM reverse mortgage typically has lower interest rates than a proprietary reverse mortgage, making it more affordable. However, an HECM loan requires mortgage insurance, and the loan amount is limited.
A single-purpose reverse mortgage loan is the most affordable option of the three, but it’s the most difficult to find. This type of reverse mortgage works by creating an agreement in which the lender gives the borrower funds for a specific purpose, such as paying property taxes or upkeep, in exchange for home equity.
Texas homeowners usually get it from local government agencies or non-profit organizations, as most lenders do not offer a single-purpose reverse mortgage.
A proprietary reverse mortgage loan is neither insured by the FHA nor as heavily regulated. As a result, there are no maximum loan amounts, no mandatory counseling, and fewer protections for the borrower.
They have higher interest rates and higher fees and are more likely to be included in a reverse mortgage scam. They are also not as common as HECM loans.
Texas-Specific Regulations and Protections
Texas reverse mortgage laws are unique in that they are a part of the state’s constitution. If you’re a Texas homeowner looking for a reverse mortgage loan, you have the following protections:
- Both spouses must be 62 or older – Borrowing spouses must be at least 62, whereas non-borrowing spouses can be younger.
- Capped fees – In Texas, reverse mortgage fees are capped at 3%.
- Loan-to-value ratio – The maximum LTV can be 80%.
- Mandatory counseling – At least five days have to pass between the counseling session and closing.
- Non-recourse protection – The loan must be a non-recourse loan, meaning the borrower or their estate will never owe more than the home’s value at the time the loan is repaid.
- Cooling-off period – Twelve days have to pass between the loan application and closing, so the homeowner has time to think and consult a financial advisor.
- No deferral for non-borrowing spouses – Due to a court decision, lenders are not able to offer a deferral period for non-borrowing spouses in Texas.
Ideal Candidates for Texas Reverse Mortgages
Ideal candidates for a reverse mortgage in Texas include people who plan to age in place, people seeking supplement retirement income, and seniors who want financial relief without selling their home outright.
Seniors Determined to Age in Place
Reverse mortgage loans are particularly beneficial for addressing aging-in-place costs, potential property tax burdens, and home modification needs. With a reverse mortgage, seniors can remain in their homes for as long as they wish, provided they continue to meet the loan requirements, such as maintaining the property and paying insurance.
Many people also take out reverse mortgages to pay for home modifications, such as improving accessibility and comfort.
Retirees Seeking to Supplement Income
Reverse mortgages can help retirees in Texas address rising living costs alongside their Social Security and other retirement income. Depending on their financial situation, retirees may take out a reverse mortgage to improve their financial standing. The average retirement income in Texas is $53,000 annually, but many people need more to live comfortably, especially if they have significant medical expenses.
It’s important to note that while a reverse mortgage doesn’t impact your Social Security or Medicare benefits, it may affect Medicaid and Supplemental Security Income.
Homeowners Wanting Financial Relief
A reverse mortgage eliminates monthly mortgage payments, helping homeowners build a financial buffer to protect themselves from rising living costs, unexpected expenses, and emergency situations.
With a home equity conversion mortgage, they can use the money to satisfy their other needs and pay off bills such as taxes or homeowner’s insurance. They can also unlock home equity while keeping their home and remaining in control of their property.
How to Qualify for a Reverse Mortgage?
Here are the requirements to qualify for a reverse mortgage:
- Borrowing homeowners must be at least 62 years old
- They must own the property or most of it
- It must be their primary residence
- No obligations owed to the federal government
- They must be able to finance ongoing costs such as maintenance and taxes
- They must consult a HUD-approved counselor
In addition, your home must be:
- A single-family home with one unit occupied by the borrower
- A condo approved by the Department of Housing and Urban Development
- A FHA-approved manufactured home
How a Reverse Mortgage Impacts Your Financial Situation
Just like home equity loans and HELOCs, reverse mortgages are not without risk. However, they can help reverse mortgage borrowers achieve better financial stability through regular, fixed income or a lump sum payment used to pay off bills.
Of course, they must pass the financial assessment and discuss the terms with their reverse mortgage specialist to be sure they are making the best decision.
Texas Property Taxes and Reverse Mortgages
Even with a Texas reverse mortgage, homeowners are still responsible for paying property taxes. Failure to keep up with property tax payments can lead to difficulties.
Luckily, homeowners with reverse mortgages can still apply for and benefit from property tax exemptions, such as the homestead exemption and senior exemption. Texas offers property tax deferral options for homeowners aged 65 and older or those with disabilities, allowing them to defer estate taxes until the home is sold or they pass away. Before applying for a deferral, you will need to contact your mortgage company.
However, even if the financial assessment shows the owner may struggle with paying property taxes and other costs, the lender can offer a Life Expectancy Set-Aside (LESA). LESA refers to loan proceeds that the lender withholds from the borrower to cover property costs.
The Role of Homestead Laws
If you obtain a reverse mortgage in Texas, you are still protected by homestead laws, which allow you to qualify for property tax deferrals and exemptions. This can help ease financial burdens for homeowners.
However, it’s important to understand that homestead protections do not apply to mortgage loans or other debts. As a result, even with these protections in place, you could still lose your home if you fail to meet the obligations of your reverse mortgage, such as paying estate taxes and maintaining the property.
No Monthly Mortgage Payments
Without monthly loan payments, you have more disposable income to cover other expenses. Since retirees typically have a fixed income, removing a monthly payment lets them manage rising costs of living or other expenses.
You can also save or invest extra funds, potentially leaving a larger inheritance to your family. Alternatively, you may decide to redirect the funds to home modifications, in-home care, or other support services.
No Restrictions on Use of Reverse Mortgage Funds
With a home equity conversion mortgage, there are no restrictions on how you use the funds, from leisure to travel and home improvements. Unlike with a single-purpose reverse mortgage, the lender has no say in what you do with your money.
How is the Reverse Mortgage Loan Amount Determined?
The total loan amount is determined by several factors:
- The age of the youngest borrower – The older the borrower, the larger the amount, as older borrowers are statistically expected to live fewer years, reducing the lender’s risk.
- The appraised value of your home – Higher home values typically result in higher loan amounts.
- Existing mortgage balance – If you have an existing mortgage or other liens on your home, the reverse mortgage must first be used to pay them off, which cuts on your loan.
- FHA lending limit – The FHA sets a limit on HECM loans, which is currently $1,149,825.
- Loan costs – Origination and closing costs will vary and affect your loan proceeds. You may also need to pay Mortgage Insurance Premium on home equity conversion mortgages.
Home Equity Conversion Mortgage Draw Options
A home equity conversion mortgage has the advantage of several draw options, meaning you can choose the best one for your financial situation:
- Monthly income for a fixed term or life
- Line of credit
- Lump sum
- Any combination of the three
Summary
Reverse mortgages offer numerous benefits to senior homeowners, including increased cash flow, opportunities to pay off bills, and the ability to modify their homes so they can comfortably age in place. By unlocking your home equity without selling your primary residence, you can use your money as you please, enhancing your financial stability and independence.
If you want to explore how a reverse mortgage can benefit you, contact us at (623) 806-4645 to discuss your options with a professional broker.