What Is a Reverse Mortgage?
If you’re a homeowner aged 62 or over with substantial home equity, then a reverse mortgage may be the perfect lending solution for you. By taking advantage of this loan type, which is distinct from that used to buy a home, you can borrow against your property’s value and enjoy funds in the form of an instant lump sum payment, fixed monthly installment plan, or line of credit – without having to make any payments throughout your lifetime!
When the homeowner passes away, moves out of their home permanently, or sells it, they will not be held responsible for any amount over the value of the home—the entire loan balance is due and payable up to a certain limit. The U.S Government enforced regulations ensure that lenders structure transactions in such a way that no more than the market value of your property is taken on as debt. Even if circumstances arise where this occurs – say if there’s a dip in house prices or should you live longer than expected – mortgage insurance has got you covered!
Important Takeaways
- A reverse mortgage is a type of home loan for seniors ages 62 and older.
- Reverse mortgage loans allow homeowners to convert their home equity into cash income with no monthly mortgage payments.
- Reverse mortgages can be a great financial decision for some seniors
- Make sure you fully understand how reverse mortgages work and what they mean for you and your family before borrowing.
Cash in Equity
Reverse mortgages can be an advantageous option for seniors whose net worth is mostly comprised of their home equity, offering them access to the cash they need.
Home equity continues to be a valuable source of wealth for retirement-age individuals, reaching an all-time high in Q1 2022 with $11.2 trillion held by homeowners ages 62 and older according to the National Reverse Mortgage Lenders Association.
Home equity is only a truly valuable asset if you decide to downsize or borrow against it. This is where reverse mortgages come in, especially for retirees with limited incomes and few other resources – however they can also be beneficial for those who desire to diversify their income and minimize investment risk, sequence risk and longevity risk. In addition, reverse mortgages provide cash without demanding monthly debt payments.
How a Reverse Mortgage Works
With a reverse mortgage, the lender pays the homeowner rather than vice versa all while the borrower maintains ownership over their home. Homeowners can select how to receive these payments and are only responsible for interest on what they take out of the loan – which is then rolled into their balance so that there are no upfront costs.
Like a typical mortgage, your home serves as the collateral for a reverse mortgage. When you move or pass away, the profits from selling your house will go towards repaying both principal and interest payments on the loan, along with any additional fees associated. Any proceeds beyond that amount remain with either yourself (if alive) or your estate (after death). In some cases, inheritors may petition to settle up their parents’ debt in order to retain ownership of its property.
Types of Reverse Mortgages
There are three main types of reverse mortgages, and the most popular one is the Home Equity Conversion Mortgage (HECM). This type of mortgage covers home values that go below conventional loan limits – set by Federal Housing Finance Agency. Dubbed a ‘Federal Housing Administration (FHA)reverse mortgage’, it can be obtained only through FHA-approved lenders.
When you opt for a reverse mortgage, you have the choice to receive your payments in six different ways:
- Lump sum: Get all the proceeds at once when your loan closes. This is the only option that comes with a fixed interest rate. The other five have adjustable interest rates.
- Equal monthly payments (annuity): For as long as at least one borrowerlives in the home as a principal residence, the lender will make steady payments to the borrower. This is also known as a tenure plan.
- Term payments: The lender gives the borrower equal monthly payments for a set period of the borrower’s choosing, such as 10 years.
- Line of credit: Money is available for the homeowner to borrow as needed. The homeowner only pays interest on the amounts actually borrowed from the credit line.
- Equal monthly payments plus a line of credit: The lender provides steady monthly payments for as long as at least one borrower occupies the home as a principal residence. If the borrower needs more money at any point, they can access the line of credit.
- Term payments plus a line of credit: The lender gives the borrower equal monthly payments for a set period of the borrower’s choosing, such as 10 years. If the borrower needs more money during or after that term, they can access the line of credit.
Who Is a Reverse Mortgage Right For?
A reverse mortgage could appear comparable to a home equity loan or HELOC, allowing you access to either a lump sum or line of credit depending on your current market value and the amount paid off. Nonetheless, unlike those loans, you do not need an income nor good credit in order to be eligible and no payments are required while living in that house as your principal residence.
For seniors looking for an alternate way to access their home equity without having to sell it, a reverse mortgage is a great option especially for seniors who:
- Don’t want the responsibility of making a monthly loan payment
- Can’t afford a monthly loan payment
- Can’t qualify for a home equity loan or cash-out refinance because of limited cash flow or poor credit
Seniors could also explore other loan options such as unsecured personal loans, which offer a lump sum of cash without the need for collateral. Yet unlike reverse mortgages, these types of loans require monthly repayment.
What Is Required for a Reverse Mortgage?
Property Type
If you own a house, townhouse, condominium, or manufactured home constructed after June 15th 1976 then there is a chance that you are eligible for the reverse mortgage. Unfortunately cooperative housing owners cannot take advantage of this opportunity as they do not actually possess the real estate in which they live.
Age and Equity
If you are at least 62 years old and own your home in full or have a significant amount of equity (50%+), then you may be eligible to obtain a reverse mortgage.
Counseling
To ensure an informed decision, the U.S. Department of Housing and Urban Development (HUD) mandates that any individual considering a reverse mortgage must take part in a HUD-approved counseling session.
Collateral Protection
As a reverse mortgage beneficiary, you must meet certain responsibilities. You must remain up-to-date on property taxes, homeowners insurance (as well as any applicable homeowners association fees) and keep your home in good condition.
When Do You Have to Repay a Reverse Mortgage?
The borrower will be required by the lender to repay the reverse mortgage if the borrower does the following:
- sells the home
- resides outside the home for more than a year
- passes away
- fail to maintain the property
- stops paying your homeowners insurance premiums or property taxes
Despite these rules, exceptions exist for spouses who meet the eligibility criteria and intend to continue living in their home after their borrowing partner’s death.
Can You Refinance a Reverse Mortgage?
Absolutely, you can refinance a reverse mortgage. Refinancing may be an ideal for situations where your spouse needs to be included in the loan, additional equity must be gained, or when you are able to secure an interest rate much lower than your current one. Refinancing should not be taken lightly; however if any of these conditions apply to you then this might just prove to be a beneficial decision.
Get The Mortgage That’s Right For You
If you’re looking for the best reverse mortgage lender in town, be sure to do your homework first. At Sword Mortgage, we believe that an informed customer is the best kind of customer. Therefore, our loan officers will take the time to fully explain your options and help you understand all aspects of your unique situation before making a decision. Call 770-826-0222 to speak to a mortgage professional or get started on your loan application process today.
