A reverse mortgage is a special type of loan that allows homeowners to use the equity in their home to get cash, and it’s growing in popularity. But what exactly is a reverse mortgage? In this blog post, we will discuss everything you need to know about reverse mortgages.
How does it work? And are you eligible for one? So if you are interested in learning more about reverse mortgages, keep reading.
Reverse Mortgage Explained
A reverse mortgage is a loan that allows you to convert the equity in your home into cash. Unlike traditional mortgages, you don’t have to make any payments or repay the loan until you move out or sell your house.
The borrower of this loan is usually a senior citizen. This loan can be used to pay off other debts and expenses or simply to provide a steady source of income for everyday living costs.
Reverse mortgages can be taken out by borrowers who are 62 years old or older and own their homes outright (or are very close to doing so).
During this time, they receive money from their lender in monthly payments—and once the borrower passes away, there will be no more payments owed on loan.
How a Reverse Mortgage Works
A reverse mortgage, which is also called a home equity conversion mortgage or HECM, works like this:
Instead of making payments to the lender every month (which normally happens with mortgages), the lender makes payments back to you—and only interest on those proceeds is paid. You get to decide how these funds will be used once they come in, and never have more than 50% of your current home value tied up, as it can impact the selling price.
The interest is added to the amount of money loaned, so there are no up-front charges. The homeowner also retains ownership of the property. However, over time their debt will grow, and equity will shrink due to paying off only part—rather than 100%—of their original mortgage balance each month for years on end.
Like a forward mortgage, the home is collateral for a reverse mortgage. When the homeowner moves or dies, proceeds from selling their house will go to pay off the principal on those mortgages and other associated costs such as insurance.
If the home has been sold, any money that remains after paying off the mortgage belongs to whoever was repaid for having loaned it in the first place (if still alive) or is willed to whoever inherits whatever assets have been left behind by this person.
Types of Reverse Mortgage
There are three types of reverse mortgages loan:
HECMS: This loan is insured by the Federal Housing Administration (FHA) and can be taken out by seniors aged 62 or older. Because the federal government backs these loans, HECMs often have more flexible terms than those offered by private lenders.
FHA- This type of mortgage loan offers mortgage insurance to approved lenders. FHA home loans are a good option for borrowers who can’t make large down payments, have lower credit scores, or will not qualify for conventional mortgages. Borrowers with FHA loans must purchase FHA mortgage insurance. Mortgage insurance premiums (MIPs) collected from FHA-insured loans help pay for the program.
Proprietary Reverse Mortgage: This type of loan allows senior homeowners to access the equity in their homes through a private lender. Proprietary reverse mortgages are sometimes called jumbo reverse mortgages because the limit set by the Federal Housing Administration (FHA) is on that loan size, which means they’re best suited for people who want access to more money than a standard HECM provides.
Who is Eligible for a Reverse Mortgage?
In order to get a reverse mortgage, some factors need to consider:
You first need to make sure that you own your home and build on or after June 15, 1976. Under FHA rules, your home must be your primary residence, and you can’t have another mortgage. The home must also be free of liens or other encumbrances, such as tax bills and judgments against you.
You must be 62 years old to apply for a reverse mortgage, but some lenders may offer loans for younger borrowers with special circumstances.
You Must Attend Counseling
Before you apply for a reverse mortgage, you’ll need to attend a counseling session with an approved counselor. The counselor will explain how the loan works and help you understand what taking out a reverse mortgage means. The counseling may last 90 minutes and discuss the pros and cons of taking a reverse mortgage.
Ways to Claim Your Reverse Mortgage
You can choose how to receive your loan proceeds if you get approved for a reverse mortgage. Here are the ways:
- Lump sum: It is a one-time payment of the loan’s value; if you take this option, you’ll have fixed interest rates.
- Annuity: The lender will make steady payments to the borrower as long as at least one borrower lives in the home.
- By terms: Borrowers make monthly payments to the lender throughout a period, such as ten years.
- Line of credit: The homeowner has access to additional funds when needed and pays only interest on the amount borrowed.
- Equal monthly payments with a line of credit: The reverse mortgage lenders provide steady monthly payments over the loan as long as at least one borrower occupies the home as their principal residence. If any borrowers need more money at any point in time and qualify for an extra line of credit, they can access it.
Reverse Mortgage Pros
If you find it difficult to meet your financial obligations, a reverse mortgage might help. The benefits include:
- Secure your retirement
- Pay off debts or other obligations
- Improve your quality of life
- Increase your home’s value by making repairs, renovations, and improvements
- You can stay in your home
Reverse Mortgage Cons
So what are the drawbacks of reverse mortgage loans? Though it seems like there are many benefits, there are also some serious risks that should be considered. These includes:
- Your home might be foreclosed if you fail to make payments
- You could lose all your equity in the home
- If you move, there are restrictions on what you can do with it.
- You may be required to pay back some or all of the loan balance
- Your heirs may need to monthly mortgage payments and property taxes if you pass away before it is paid off
- Homeowners should pay property taxes and homeowners insurance, use the property as their principal residence and keep their house in good condition.
- The mortgage insurance premium can add up.
There are many reasons to consider a reverse mortgage loan. However, there are also some risks involved with this type of loan. Make sure you understand all the details and implications before making a decision. If you decide to take out this type of loan, make sure you start saving now to pay off your debt when it comes due!