A reverse mortgage can be a challenge to explain or understand, even for people who have plenty of financial experience.
What Is a Reverse Mortgage?
There are many factors that play part in a reverse mortgage, but at its core, it is a home equity loan that is designed to help borrowers tap into the equity in their homes.
Reverse mortgages allow homeowners to relinquish the equity in their home in exchange for regular payments, typically to supplement retirement income.
A reverse mortgage is also called a Home Equity Conversion Mortgage (HECM), it works the exact opposite of a traditional home loan. With a reverse mortgage, borrowers tap into their existing home equity.
Who Utilizes Reverse Mortgages?
Many seniors consider reverse mortgages because it allows for a homeowner to access the equity in their home. It helps alleviate potential financial woes by using the money they put into their homes to now supplement their income. Many older individuals are in need of a little extra cash but don’t want to move in order to downsize or lower their monthly output.
Instead of selling their homes to access their home equity, senior citizens who make the decision to take out a reverse mortgage can receive monthly income or a lump sum and stay where they are.
Who is Eligible for a Reverse Mortgage?
To qualify for a reverse mortgage:
You are 62 years of age or older
You own your home outright and use it as your primary residence
The house is single-family, multi-family (limit up to 4), or an approved condominium or manufactured home
You own your own home outright (free and clear) or only have a small amount left to pay on the existing mortgage
Your home is in good condition, not needing drastic improvements prior to taking out the loan
All potential borrowers must also undergo a financial assessment to qualify. The research into your assessment makes sure that the borrower can pay for:
Basic home maintenance
Home Owner’s Association (HOA) fees if applicable
How Much Can You Borrow?
According to the National Reverse Mortgage Lenders Association (NRMLA), a variety of factors can influence the amount of funds a homeowner may be eligible for. Those factors include the age of the home, the value of the home, and the interest rate.
There is a lot of confusion about how reverse mortgages are designed. Key takeaways are the FHA, a government agency, is not loaning you any money. You are working with a private company, and the FHA is providing a guarantee on your loan; which also means that the amount owed cannot exceed the value of the home, for example,
How Can you Withdraw Your Money?
One of the best parts of the HECM program is that borrowers are given a great deal of flexibility for obtaining the proceeds of the reverse mortgage.
There are four basic options:
Withdraw a lump sum of cash when the loan closes
Receive a monthly annuity for as long as the borrower lives in the house. This is called a “tenure” annuity.
Receive a monthly annuity for a set period of time that is chosen by the borrower. This is called a “term” annuity.
Take out a line of credit, that can grow over the passage of time, that can be used at the borrower’s discretion.
Or, a senior who is considering a reverse mortgage can also choose to combine multiple options into a plan that best suits his or her needs.
How Much Do Reverse Mortgages Cost?
The costs associated with reverse mortgages are typically higher than those on traditional loans. If you choose to move forward with a reverse mortgage, you can expect to pay higher closing costs, origination fees, appraisal fees, and mortgage insurance.
One of the great benefits with a reverse mortgage are knowing that the payments themselves are tax-free.
Reverse mortgages can be incredibly helpful for seniors who want to maintain their standard of living while not needing to apply for any other type of assistance because they are accessing one of the biggest assets they already have – their home equity.