A reverse mortgage is a type of loan that lets eligible homeowners who are 62 or older and have a significant amount of home equity borrow money against the value of their home. Unlike a regular home purchase loan, the borrower doesn’t need to make any loan payments during their lifetime. The borrowed funds can be received as a lump sum, fixed monthly payment, or line of credit.
The loan balance becomes due and payable when the borrower dies, moves out permanently, or sells the home. Federal regulations ensure that the loan amount doesn’t exceed the home’s value. If it does, the borrower or borrower’s estate won’t be held responsible for paying the difference due to the program’s mortgage insurance.
Cash in Equity
Reverse mortgages are a way for seniors to obtain cash by using the equity they have in their homes. This equity is calculated as the home’s market value minus any outstanding home loans.
The National Reverse Mortgage Lenders Association reported that in the first quarter (Q1) of 2022, homeowners aged 62 and older held a record-breaking $11.2 trillion in home equity. This figure is the largest ever recorded since the association began measuring it in 2000, indicating the significant role home equity plays as a source of wealth for older adults in retirement.
Retirees can only use their home equity if they sell and downsize or borrow against it. Reverse mortgages are a solution for retirees with limited incomes and few assets, who want to diversify their income and reduce risks. They are also beneficial for obtaining cash without monthly debt payments.
How a Reverse Mortgage Works
A reverse mortgage implies that the lender pays the homeowner, instead of the other way around. The homeowner has different options for receiving these payments, and they only have to pay interest on what they receive. The interest is added to the loan balance, so the homeowner doesn’t have to pay right away. A big advantage to a reverse loan is that the homeowner retains ownership of the property.
A reverse mortgage works similarly to a forward mortgage, with the home serving as collateral. Upon the homeowner’s movement or death, the lender receives the proceeds from the home’s sale, which are then used to pay off the reverse mortgage’s principal, interest, mortgage insurance, and fees. If there are any remaining sale proceeds after repayment, they go to the homeowner (if alive) or the homeowner’s estate (if deceased). Sometimes, the heirs may decide to pay off the mortgage to keep the home.
Types of Reverse Mortgages
This article will discuss the most common type of reverse mortgage, which is called the home equity conversion mortgage (HECM). This type represents almost all reverse mortgages offered by lenders on home values below the conforming loan limit set by the Federal Housing Finance Agency. It is also known as a Federal Housing Administration (FHA) reverse mortgage and is only available through an FHA-approved lender.
If your home has a higher value, you may consider exploring a proprietary reverse mortgage, also known as a jumbo reverse mortgage.
When you opt for a reverse mortgage, you have the option to receive the funds 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 borrower lives 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.7
You can use a reverse mortgage known as “HECM for purchase” to buy a new home instead of your current one.
To be eligible for a reverse mortgage, you usually need to have at least 50% equity in your home based on its current value, not what you originally paid for it.
Who Is a Reverse Mortgage Right For?
A reverse mortgage may seem similar to a home equity loan or a HELOC. Like these loans, it offers a lump sum or a line of credit based on your home’s value and how much you’ve paid off. However, unlike those loans, you can qualify for a reverse mortgage without an income or good credit. Also, you won’t have to make any loan payments as long as you live in the home as your primary residence.
Seniors who want to access their home equity without selling their home can do so through a reverse mortgage. This can be a great option 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
What Is Required for a Reverse Mortgage?
Property Type
You may be eligible for a reverse mortgage if you own a house, condominium, townhouse, or manufactured home built on or after June 15, 1976. However, if you own cooperative housing, you cannot apply for a reverse mortgage as you technically don’t own the real estate you live in; you own shares of a corporation.
Age, Equity, and Fees
To qualify for a reverse mortgage, you must be at least 62 years old and own your home outright or have a significant amount of equity (at least 50%). Although there are no income or credit score requirements, there are fees involved, including an origination fee, up-front mortgage insurance premium, standard closing costs, ongoing mortgage insurance premiums, loan servicing fees (if applicable), and interest. The federal government sets limits on how much lenders can charge for many of these fees.
Counseling
If you are considering a reverse mortgage, you must complete a counseling session that is approved by the U.S. Department of Housing and Urban Development (HUD). The session should take at least 90 minutes and typically costs around $125. During the session, you will learn about the advantages and disadvantages of taking out a reverse mortgage based on your individual financial and personal situation.
Collateral Protection
As per the rules of reverse mortgages, you must keep up with property taxes, homeowners insurance, and home repairs. Additionally, even if you move to a long-term care facility for medical reasons, leaving the house for more than a year will require you to repay the loan, usually by selling the house.
Avoiding Reverse Mortgage Scams
Reverse mortgages can be very profitable, but they attract scammers who target vulnerable seniors with cognitive impairments or financial difficulties. These scammers include unscrupulous contractors who offer to help seniors secure such mortgages to raise funds for home improvements. Unfortunately, some of these vendors or contractors may not follow through on their promises and instead may abscond with the seniors’ money. It is important to stay viligant, do your research, and work with a reputable mortgage broker.
Is a Reverse Mortgage Expensive?
Reverse mortgages, specifically Home Equity Conversion Mortgages (HECMs), come with various costs such as origination fees, closing costs, mortgage insurance premiums, and interest on the loan balance, both one-time and recurring. Speaking with an experienced mortgage broker about your options is the best way to determine if a reverse mortgage is a good option for your unique situation.
When Do You Have to Repay a Reverse Mortgage?
If the borrower does any of the following, the lender will require repayment of the reverse mortgage:
- 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
Eligible non-borrowing spouses have some exceptions to the rules if they want to continue living in the home after their borrowing spouse passes away.
Can You Owe More Than the Home Is Worth with a Reverse Mortgage?
Your loan balance could grow higher than the value of your home, but lenders cannot pursue borrowers or their heirs. The mortgage insurance premiums that borrowers pay go into a fund that covers lenders’ losses in these cases.
Can You Refinance a Reverse Mortgage?
It is possible to refinance a reverse mortgage, but it is recommended that you only do so if you need to add a spouse to the loan, require more equity, or if you can substantially lower the interest rate. This is because of the origination fee, upfront mortgage insurance premium, and other closing costs associated with refinancing a reverse mortgage.
Contact Sword Mortgage To Learn More About Reverse Mortgages
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) 757-5750 to speak to a mortgage professional or get started on your loan application process today.
