A reverse mortgage is available to seniors who may be considering retirement over the age of 62. This type of home equity loan may be beneficial if homeowners have a substantial amount of equity in their home but are unsure if they’ll have enough income to live on.
Among the many reasons for reverse mortgages, it mainly allows cash for seniors who have most of their net worth in their home. Several expenses can also be offset with this type of loan, including paying off the mortgage, assisting with healthcare costs, or simply supplementing a fixed income.
It is the only way for seniors to access the equity in their home without selling it.
The nature of a reverse mortgage does not require the borrower to make any monthly loan payments. Instead, homeowners are actually paid by the lender. The loan is then taken against the value of the home and can be paid out to the homeowners in a lump sum, monthly payments, or a line of credit. With a few exceptions, the money can be used for whatever purpose is desired.
Another benefit to the borrower is they will never owe more than the value of the home in the loan. If the balance is less than the value at time of repayment, the balance is kept.
The interest is rolled into the balance of the loan so nothing is paid up front. As with any loan, the home is the collateral and will be due if and/or when the homeowner dies, moves away, or sells the home.
For a home to qualify for such a mortgage, they must meet Federal Housing Administration (FHA) standards and flood requirements. Qualifying properties include single-family residences, multi-unit homes where the borrower lives in one unit, approved condos and FHA-compliant manufactured homes.
Also, borrowers can expect lenders to check their financial responsibility and credit. There can be no federal debts outstanding and borrowers must be up to date on any taxes.
A Home Equity Conversion Mortgage (HECM) is one that is insured by the U.S. Federal Gevernment reverse mortgage, but it is available only through an FHA-approved lender. Under this program, certain requirements must be met, such as the minimum age of 62.
Borrowers must also own the property outright or have paid down a substantial amount. Borrowers must also occupy the home as the primary residence, not be delinquent on any taxes, and be able to pay any future taxes and insurance on the property.
Single-Purpose is another type of reverse mortgage. These are offered by state and local governments and are typically approved for more restrictive uses, such as improvements or taxes.
Proprietary reverse mortgages are used in the case where a home is appraised at a high value. The mortgages are not federally insured and therefore, do not have mortgage insurance premiums. If the borrower has a lower mortgage, they can receive a higher loan. However, lenders can charge higher interest rates to make up for lost insurance premiums.
Since reverse mortgages are a specialized product, only certain lenders will sell them. And since these institutions cannot receive more than the value of the house, some will charge mortgage insurance premiums.
Other fees and costs exist, such as origination fees, service fees, and closing costs. Interest is also added to the amount owed in return each month.
Most interest rates in connection with reverse mortgages are variable and are subject to change, depending on market fluctuations. Nor are they tax deductable.
Since the equity is the key driver in securing the mortgage, heirs will stand to receive fewer assets once repayment is settled. Also, in the case of death, if a surviving spouse did not sign any of the loan agreements, they will stop receiving funds.
Securing these loans can be a confusing process, which can make scams all the more prevalent.
Potential borrowers should consider all options available to them before attaining a reverse mortgage. With proper education and research, it could be a very useful tool.