Understanding Reverse Mortgages: What It Is and How Does It Work | Money
Story by Jeremi Davidson • Yesterday 11:44 AM A reverse mortgage is a home loan that allows older homeowners to borrow against their home’s equity. Unlike a traditional loan, a reverse mortgage doesn’t require the homeowner to make monthly mortgage payments. Instead, the borrower receives money from the lender — either monthly, via a line of credit or in a single lump sum at closing. These loans are typically reserved for borrowers 62 and up (though some lenders allow for ages down to 55). Homeowners often use them to reduce their monthly housing costs or increase their income in retirement. Keep reading to learn more about reverse mortgages, how they work and whether they might suit you in retirement. Table of contents What is a reverse mortgage? A reverse mortgage is a loan that allows seniors to borrow a portion of their home’s equity. They can access these funds as one upfront sum, via regular monthly payments or on an as-needed basis. The amount of money borrowed via a reverse mortgage is only due when the borrower: Many older homeowners use reverse mortgages to supplement their income in retirement. Reverse mortgages can also help reduce housing expenses (because there are no monthly payments), increase cash flow or pay for home repairs or improvements. Types of reverse mortgages There are three different types of reverse mortgages: Home Equity Conversion Mortgages (HECMs), proprietary reverse mortgages and single-purpose reverse mortgages. Like regular mortgages, these loans can feature fixed or adjustable rates. Fixed-rate mortgages give you a set interest rate for the entire loan term, while your interest rate can fluctuate over time with an adjustable-rate reverse mortgage. Some lenders offer multiple types of loans, each serving a unique purpose. Understanding the differences between each one will help guide you to the right financial product to meet your needs. Home Equity Conversion Mortgage (HECM) The most common type of reverse mortgage is a Home Equity Conversion Mortgage (HECM), which is federally backed and regulated by the Federal Housing Administration (FHA) and the U.S. Department of Housing and Urban Development (HUD). It’s only available through a HUD-approved lender. Every HECM borrower must be 62 or older and participate in a HUD-approved HECM counseling session before taking out a reverse mortgage. During this session, you’ll learn about the HECM program’s requirements, repayment options and tax implications. Your counselor will also discuss your individual needs and finances. HECMs come with FHA insurance and are non-recourse loans, meaning you’ll never owe more than your house sells for, even if your outstanding loan balance is larger. However, you must pay a mortgage insurance premium (MIP) with a HECM. This service costs 2% of your loan upfront and 0.5% of your outstanding balance annually. HECMs offer several options for receiving your funds, depending on your financial needs: With a HECM, the maximum amount you can borrow is $1,089,300 for 2023, though the amount you’ll qualify for depends on the appraised value of your home, your existing mortgage balance and other financial details. Your lender will require an appraisal of your property to determine its value before moving forward. Proprietary reverse mortgage Proprietary reverse mortgages are available exclusively through private reverse mortgage lenders. Private reverse mortgage lenders set their own terms, which may differ from HUD loan terms. Some call these loans jumbo reverse mortgages, as they can exceed the limits set by HUD for HECM loans, with some lenders offering up to $6 million. These loans also don’t have to adhere to HECM’s age rules. As a result, many lenders allow borrowers as young as 55. Since the federal government doesn’t insure proprietary reverse mortgages, you won’t need counseling to qualify, nor will you pay monthly insurance premiums. However, you may pay a higher interest rate because lenders are taking on more risk than with government-backed loans. Single-purpose reverse mortgage Single-purpose reverse mortgages are loans designated for a specific, lender-approved goal, like paying property taxes or improving your home. State and local government agencies and non-profit organizations offer these loans, and they typically have lower fees and interest rates than other reverse mortgage products. Eligibility requirements are also less rigid, making them easier to qualify for than a HECM or jumbo reverse mortgage. How does a reverse mortgage work? An easy way to think of a reverse mortgage is as an advance on your home’s eventual sale. The lender sends you the money, either in monthly payments, periodic withdrawals or as a lump sum. When you die or sell your house, you or your heirs will repay the loan out of your home’s sale proceeds. During your reverse mortgage term, you won’t need to make payments to your lender — although you can if you prefer. However, you must stay current on property taxes, insurance and homeowners association dues to avoid liens. You must also maintain the property — if your roof needs replacing, it falls on you to pay for it. If you fail to meet these obligations, your lender could call your loan due or even foreclose on your house. Pros and cons of reverse mortgages As with any loan, reverse mortgages have benefits and drawbacks. Understanding the pros and cons of reverse mortgages can assist you in making the right decision for your future finances. You’ll probably hear a lot about the benefits of a reverse mortgage, and much of this information is accurate. Reverse mortgages can be advantageous to many individuals because they: However, most lenders won’t be forthright with you about the drawbacks of these loans. Some cons associated with a reverse mortgage include: Reverse mortgages can be complicated, so it’s wise to learn as much as possible about how they work before signing up for anything. The more knowledge you have on the pros and cons, the easier it becomes to make a final decision. How to apply for a reverse mortgage In order to apply for an HUD reverse mortgage, you must meet HUD’s minimum eligibility requirements for a HECM loan. These requirements include the following:
Using A Reverse Mortgage When Planning Your Finances
Many of us are familiar with the traditional home mortgage when financing a house. While this is a great tool for helping people get into their dream homes, not many know that there is another option available – reverse mortgages. Reverse mortgages can have huge benefits and advantages if used properly, especially as part of a financial planning strategy. In this post, we’ll explore how a reverse mortgage works, and how you can use reverse mortgages to your advantage in helping you achieve your retirement goals. Reverse Mortgage Overview As we grow older, our financial needs continue to change. With retirement age inching closer, many seniors look for ways to borrow against home equity. A reverse mortgage is one option that allows a homeowner to do just that. Unlike a traditional mortgage, a reverse mortgage is a type of mortgage that pays homeowners during their retirement years. In 2021, there were 49,207 applicants for reverse mortgage loans, but it’s important to note that this option has both advantages and disadvantages and may not be suitable for everyone. Benefits of Using a Reverse Mortgage to Supplement Your Retirement Income A reverse mortgage allows 62 years and older homeowners to convert a portion of their home’s equity into tax-free cash without selling their home or making monthly mortgage payments. A reverse mortgage can provide extra funds to cover daily expenses or unexpected costs and help seniors maintain their independence and improve their overall quality of life. So if you’re looking for a smart and secure way to enhance your retirement income, consider exploring the benefits of a reverse mortgage today. Negative Implications of Utilizing a Reverse Mortgage Although reverse mortgages can provide a valuable source of income for seniors looking to tap into their home equity, it is important to consider the potential negative implications before committing to this type of loan. One major concern is its impact on the borrower’s heirs. Since the loan must be repaid in full when the borrower passes away or sells the home, it can significantly reduce the inheritance they hoped to leave behind. Another consideration is the high fees and interest rates associated with reverse mortgages, which can quickly eat into the home’s equity. It is important to carefully weigh the pros and cons before deciding whether a reverse mortgage is right for you or your loved ones. The Types of Reverse Mortgages Available There are three main types of reverse mortgages available, and each has its own unique set of features and benefits. As with any financial product, it is important to carefully consider the pros and cons of each type of reverse mortgage before deciding which one is right for you. The Qualifying Criteria for Obtaining a Reverse Mortgage Obtaining a reverse mortgage isn’t automatic. Certain qualifying criteria must be met before a lender can provide a reverse mortgage. First, the homeowner must have at least 62 years of age and significant equity in the home. Secondly, the home must be the homeowner’s primary residence. Lastly, the homeowner must be able to pay property taxes and homeowners insurance independently. By meeting these criteria, homeowners can unlock the equity in their homes without having to sell or move out. Pros and Cons of Reverse Mortgages Conversely, a reverse mortgage can provide a much-needed cash infusion, which can be especially helpful to those on a fixed income. On the other hand, there are significant drawbacks to consider. Interest rates tend to be higher than traditional mortgages, and the fees can be substantial. Because a reverse mortgage means borrowing against the equity in your home, it can ultimately decrease the amount of inheritance you leave behind for your loved ones. Ultimately, the decision to take out a reverse mortgage is complex and requires careful consideration. Bottom Line Taking out a reverse mortgage can provide your retirement years financial security, but it should not be taken lightly. Each situation and individual is different, so carefully evaluate the risks and rewards before committing to a reverse mortgage. As with other decisions in life, thoroughly discussing your decision with family and professionals is always recommended due to the complexity of financial planning. A reverse mortgage can help supplement your retirement income, but only if the pros outweigh the cons for you and they fit into your overall plan for a happy and secure retirement. By Jacob Maslow -June 21, 2023