Reverse Mortgage
What Is a Reverse Mortgage? (Reverse Mortgage Explained)
A reverse mortgage is a type of loan available to homeowners, 62 years or older, that allows them to convert part of the equity in their homes into cash.
The product was conceived as a means to help retirees with limited income use the accumulated wealth in their homes to cover basic monthly living expenses and pay for health care.
In a traditional mortgage, borrowers make regular payments to their lender.
However, with a reverse mortgage borrowers receive money from their lender instead of paying it out.
To qualify for a reverse mortgage, homeowners must be at least 62 years old and have substantial home equity.
Borrowers are not required to make any payments on the loan until they no longer live in the home or pass away.
The loan is repaid when the homeowner sells their home or passes away.
Reverse mortgages can provide retirees with an additional source of income to supplement Social Security, pension(s), and other forms of income.
In addition, reverse mortgages can be used to pay for medical treatments, make home improvements, pay property taxes, or simply free up some extra cash.
For those who are considering a reverse mortgage, it’s important to understand the risks associated with this type of loan and speak to a qualified professional who can help you decide if one is right for you.
How to Pay Off a Reverse Mortgage
When a borrower takes out a reverse mortgage, they are not required to make any payments on the loan as long as they continue living in the home.
When the homeowner passes away or moves out of their home, then the loan must be repaid.
Repayment of the loan can typically be done by selling off assets, refinancing the property, or taking out an insurance policy.
Borrowers should also consider whether their heirs will wish to keep the home after repayment is made.
If so, they may need to plan for additional funds to cover repayment costs and other expenses related to maintaining ownership of the property.
It’s important for borrowers to understand that any remaining equity in their home after repaying their reverse mortgage loan may go to the lender.
Borrowers should speak with a qualified financial advisor to ensure they understand all of their repayment options and that the best plan is in place for them.
What Are The Rules for Getting a Reverse Mortgage?
Reverse mortgages are an attractive option for many older adults who have accumulated significant equity in their homes.
In order to qualify for a reverse mortgage, borrowers must meet certain criteria.
The most important of these requirements include:
- The borrower must be at least 62 years old and the home must be their primary residence.
- Must have sufficient equity in their home.
- Borrowers must demonstrate that they can continue to pay taxes and insurance on the property throughout the life of the loan.
- The home must also meet all FHA standards (if an FHA loan).
- Must own at least 50% equity in your home.
These rules are designed to ensure that borrowers understand all of the risks associated with taking out a reverse mortgage and will be able to make payments on time throughout the life of their loan.
By following these guidelines, borrowers can benefit from the security and flexibility that a reverse mortgage provides while avoiding potential financial pitfalls.
How Does a Reverse Mortgage Work
Types of Reverse Mortgages
1) FHA Insured
Home Equity Conversion Mortgages (HECM) are the official term for FHA-insured reverse mortgages.
This type of loan is backed by the Federal Housing Administration and is available to those 62 or older.
2) Non-FHA Insured
Non-FHA insured reverse mortgages are available to those who do not qualify for an FHA loan due to their age or creditworthiness.
3) Single-Purpose Reverse Mortgages Offered by State and Local Governments
Single-purpose reverse mortgages are available from state and local governments, as well as certain charities.
These loans must be used for a specific purpose, such as home repairs, medical bills, or property taxes.
Each type of reverse mortgage is designed to meet the unique needs of certain borrowers and are available from lenders all across the country.
Borrowers should carefully consider their individual situation and consult a qualified financial advisor to find out which type of loan might be best for them.
How Do You Pay Back a Reverse Mortgage?
A reverse mortgage is a type of home loan that allows homeowners to borrow money against the equity in their home without having to make monthly mortgage payments.
Instead of making payments to the lender, the lender makes payments to the borrower, and the loan balance increases over time.
When it comes time to pay back a reverse mortgage, there are a few different options for repayment.
The specifics will depend on the terms of your loan, your financial situation, and your personal preferences.
Here are some common ways to pay back a reverse mortgage:
- Sell the home: The most common way to pay back a reverse mortgage is to sell the home. When the borrower sells the home, the lender will be paid from the proceeds of the sale, and any remaining equity will go to the borrower or their heirs.
- Refinance the loan: If the borrower has sufficient equity in the home and meets the lender’s credit and income requirements, they may be able to refinance the reverse mortgage into a traditional mortgage. This would allow the borrower to start making monthly mortgage payments and paying down the loan balance.
- Pay off the loan in full: If the borrower has the financial resources to do so, they may choose to pay off the reverse mortgage in full. This could be done with cash, by selling other assets, or by using a combination of methods.
- Allow the loan to become due and payable: If the borrower is no longer able to live in the home as their primary residence (for example, if they move to a nursing home or pass away), the loan will become due and payable. The lender will then sell the home and use the proceeds to pay off the loan.
Reverse Mortgage Example
Here is an example of how a reverse mortgage might work:
John is a retired homeowner who is 62 years old and has significant equity in his home.
He is looking for a way to supplement his retirement income, but he does not want to sell his home or take on a traditional mortgage with monthly payments.
John decides to apply for a reverse mortgage.
After completing the application process and meeting with a reverse mortgage counselor, John is approved for a reverse mortgage loan.
He decides to borrow a lump sum of $100,000, which he will receive in a single payment.
John does not have to make any monthly payments on the loan, and the interest on the loan is added to the balance.
Over time, the balance of John’s reverse mortgage loan increases as the interest accumulates.
However, John is not required to repay the loan as long as he continues to live in the home as his primary residence and meets the loan’s other terms and conditions.
When John sells the home or passes away, the loan will be due, and the lender will be paid from the proceeds of the sale.
It’s important to note that reverse mortgages are not for everyone, and they can be complex financial products.
It’s important to carefully consider all of the terms and conditions of a reverse mortgage before deciding whether it is the right financial option for you.
It’s a good idea to seek advice from a financial advisor or reverse mortgage counselor before making a decision.
FAQs – Reverse Mortgage
How does a reverse mortgage work?
A reverse mortgage is a type of loan that allows homeowners who are 62 years of age or older to convert a portion of the equity in their home into cash.
This allows the borrower to get extra income, which can help pay for the operating expenses related to their home (e.g., property taxes, maintenance), among other forms of personal expenses.
The loan is called a “reverse” mortgage because the lender pays the borrower, rather than the borrower making payments to the lender.
Here’s how a reverse mortgage typically works:
- The borrower must own their home outright or have a low mortgage balance that can be paid off with the proceeds of the reverse mortgage.
- The borrower must also meet the lender’s age and eligibility requirements.
- The borrower must receive counseling from an independent third party before obtaining a reverse mortgage.
- The borrower and the lender agree on the terms of the reverse mortgage, including the amount of the loan and any fees.
- The lender pays the borrower a lump sum, a line of credit, or a combination of both. The borrower does not have to make any payments on the loan as long as they continue to live in the home.
- The loan becomes due and payable when the borrower sells the home, moves out permanently, or passes away. At that point, the borrower’s heirs or estate must either pay off the loan or sell the home to pay off the loan.
What are some benefits of a reverse mortgage?
A reverse mortgage can help you remain in your home for as long as you like, while giving you access to cash when needed.
It also offers financial stability by potentially eliminating or reducing existing debt and supplementing retirement income.
Furthermore, it does not require repayment until after you no longer live in your home or pass away.
What are the pros and cons of a reverse mortgage?
Pros:
- Financial stability and security
- Ability to access additional funds when needed
- No repayment required until after you no longer live in the home or pass away
Cons:
- High up-front costs and interest rates may be higher than traditional mortgages
- Reduced inheritance for heirs since the loan is typically due when homeowners leave the home or pass away
- If too much of a balance accumulates, it can risk default and loss of the home
Are there any eligibility requirements?
Yes, most lenders require that borrowers must be at least 62 years old, own their primary residence outright, have sufficient equity in their property, and meet minimum credit score requirements.
Additionally, a reverse mortgage requires counseling from an approved financial advisor.
It’s important to speak with your lender and financial advisor to ensure you meet all of the eligibility requirements before applying for a reverse mortgage.
What disqualifies you from getting a Home Equity Conversion Mortgage (HECM)?
To be eligible for a reverse mortgage, you must meet certain requirements set by the Department of Housing and Urban Development (HUD), which administers the federally insured Home Equity Conversion Mortgage (HECM) program.
Here are some of the basic eligibility requirements for a reverse mortgage:
- You must be at least 62 years old.
- You must own your home outright or have a low mortgage balance that can be paid off at closing with proceeds from the reverse mortgage.
- You must occupy the home as your primary residence.
- You must be a US citizen or permanent resident.
- You must meet certain financial assessment requirements to ensure that you can continue to pay your property taxes, insurance, and other ongoing expenses.
If you do not meet these requirements, you may not be eligible for a reverse mortgage.
In addition, even if you meet the basic eligibility requirements, you may still be disqualified if you have a significant amount of debt or have a poor credit history.
It’s also important to note that reverse mortgages are not available in all areas, so you may not be able to get a reverse mortgage if you live in an ineligible location.
It’s a good idea to discuss your specific circumstances with a reverse mortgage counselor or financial advisor to determine whether a reverse mortgage is right for you.
Are there income requirements for a reverse mortgage?
No, there are no income requirements for a reverse mortgage.
However, you must have sufficient income to cover any applicable taxes, insurance premiums, and other fees.
Your lender may require proof of your ability to pay these expenses before approving your loan application.
In addition, lenders may also consider your credit score and debt-to-income ratio when deciding whether or not to approve your loan.
Therefore, having a good credit score and low debt could improve your chances of being approved for a reverse mortgage.
Conclusion – Reverse Mortgage
A reverse mortgage can provide retirees with an additional source of income, allowing them to supplement Social Security or pension payments and cover medical expenses, property taxes, home improvements, and other needs.
However, it’s important to understand the risks associated with this type of loan before entering into one.
Be sure to discuss your options with a qualified professional who can help you decide if a reverse mortgage is right for you.