A reverse mortgage is a loan that enables older adults (62 years and above) to access a portion of their home equity.
Homeowners who have paid off at least 50% of their mortgage are eligible for a reverse mortgage loan. Your home will be used as collateral for the reverse mortgage loan. Some homeowners may need extra funds to enjoy their retirement, and a reverse mortgage loan can help them with that.
A reverse mortgage is the opposite of how other mortgage loan payments work. Rather than repaying the reverse mortgage loan, you'll receive regular payments from the reverse mortgage lender. If you're wondering whether this type of loan is ideal for you, read on. In this article, you'll also get all the necessary information about reverse mortgages.
How Does A Reverse Mortgage Work?
A reverse mortgage is ideal for homeowners who own at least 50% equity or have paid off their mortgage completely, granting them 100% home equity. Paying your mortgage in full will enable you to tap into more of your home equity.
The older you are, the better your chances of borrowing more funds. You can use the funds from a reverse mortgage for home improvement, medical expenses, paying off credit card debt, in-home care, or travel.
Remember, a reverse mortgage loan is not free money. The principal, interest, and other fees will accrue over the life of the loan and will become due when the homeowner dies, leaves the home permanently, or sells the home. If the home is sold, the proceeds from the sale will be used to settle the reverse mortgage loan and other necessary fees.
Any remaining balance will be given to the homeowner if alive or go to the homeowner's estate if they've passed away. If a homeowner passes away, an eligible non-borrowing spouse or co-borrower can live in the home secured by the reverse mortgage loan.
Requirements For A Reverse Mortgage
- You should be a homeowner of at least 62 years and above.
- Only homeowners whose houses, manufactured homes, townhouses, or condominiums were built on or after June 15, 1976, may be eligible for a reverse mortgage loan.
- Own at least 50% of home equity.
- The home must be your primary residence.
- You should not have any unsettled federal debt.
- For home equity conversion mortgages (HECMs), you must undergo a HUD-approved counseling session provided by the U.S. Department of Housing and Urban Development (HUD). The session will inform you about the advantages and disadvantages of obtaining a reverse mortgage loan. During the session, you will also learn more about reverse mortgages.
- Your obligation to pay property taxes, homeowners insurance, maintenance costs, and repair costs.
- Your home should be in good condition.
Types of Reverse Mortgage
Let's briefly discuss the three types of reverse mortgages so that you'll know which one is right for you.
1) Home Equity Conversion Mortgage (HECM)
Of all the reverse mortgages, HECM is the most widely used. HECMs are federally insured or backed by the federal government. With this type of reverse mortgage, you can easily tap into your home equity without medical requirements or income limitations. Most homeowners may also fancy a HECM because they can use this type of reverse mortgage loan for anything. You will also need to receive HUD-approved counseling before applying for this loan.
2) Proprietary Reverse Mortgage
This is a reverse mortgage loan that you can obtain from private lenders. It has a higher interest rate compared to HECM and single-purpose reverse mortgage loans. They are not backed by the federal government—so you don’t have to pay upfront costs or monthly mortgage insurance premiums (MIPs), which gives you the leverage to obtain more funds from the lender. If your home is appraised at a high value and you want to obtain a larger loan, a proprietary reverse mortgage may be suitable for you. Homeowners who are 55 years and above are eligible for this type of loan.
3) Single-Purpose Reverse Mortgage
This is the cheapest reverse mortgage loan. The single-purpose reverse mortgage is offered by local and state government agencies. It is also offered by nonprofits. You are only allowed to use this type of loan for one specific purpose as approved by the lender. For instance, if you want to use a reverse mortgage loan for home repairs, you can go for a single-purpose reverse mortgage.
It is also the least common among the three types of reverse mortgages. Usually, this type of loan becomes due if the homeowner stops paying homeowner’s insurance, leaves the home to a different primary residence, the home’s ownership changes, the homeowner passes away, or the city destroys the property.
How Much Does A Reverse Mortgage Cost?
This section highlights the different reverse mortgage costs.
🌀The upfront mortgage insurance premium (UFMIP)
For HECMs, the upfront mortgage insurance premium is charged at closing, which amounts to 2% of the appraised value of your home. For example, if your home is worth 150,000, you would pay $3000 UFMIP.
🌀Ongoing or annual mortgage insurance premiums (MIPs)
If you're opting for a HECM, you'll be required to pay an annual mortgage insurance premium of 0.5% of the mortgage balance.
Note: Proprietary reverse mortgages don't require upfront mortgage insurance premium cost and annual mortgage insurance premium cost.
🌀Third-party charges
You can expect third-party charges for title search, survey, appraisal to assess and quantify the value of your home, credit check, recording fees, mortgage taxes, inspections, and other real estate closing costs.
🌀Origination fees
The origination fee is the amount you’ll need to pay to process the loan. You are required to pay an origination fee of either 2% or $2500 (depending on which one is higher) of the first $200,000 of your home’s worth. You may also be charged 1% of the remaining value of your home if it is over $200,000. The overall charges for origination fees won’t be more than $6000. Origination fees apply to HECMs, as they are federally insured.
🌀Servicing fees
This is charged by the lender to assess a homeowner’s account statements and to ensure that the homeowner is up to date with the homeowner’s insurance, disbursal of funds, and property taxes. If you secure a reverse mortgage loan with an annually adjusted interest rate or fixed interest rate, you can be charged up to $30 per month. On the other hand, if you secure one with a variable interest rate, expect to pay up to $35 monthly. The fees will be added to your loan balance so that you don’t have to pay out of pocket.
🌀Reverse mortgage counseling fees
You can be charged anything from $125 or more for reverse mortgage counseling.
🌀Interest rate for a reverse mortgage loan
Some reverse mortgages can have a fixed or variable interest rate. Variable or adjustable interest rates are unstable and don’t offer much predictability to help you determine how much interest will grow or accrue over the life of the loan. For a variable interest rate reverse mortgage, homeowners are paid on a regular installment plan. For a fixed-rate reverse mortgage, you’ll receive a lump sum or one-time payment from the lender.
How Much Can You Get With A Reverse Mortgage?
Several factors will determine how much you can borrow with a reverse mortgage. Factors such as the current value of your home, the reverse mortgage interest rate, your age, and your current mortgage balance. The older you are, the better your chances of getting more funds. If you qualify for a reverse mortgage loan, you can expect to receive up to 40 to 60% of your home’s appraised value.
What Are The Alternatives To A Reverse Mortgage?
But maybe you don't fancy the idea of obtaining a reverse mortgage loan—not to worry! Here are five alternatives to opt for:
1) Home Equity Loan
This is a type of loan that gives you access to your home equity. Like a reverse mortgage, your home will be used as collateral. You'll need to own at least 15 to 20% home equity. If you qualify for a home equity loan, you would be given a lump sum that you need to repay in monthly installments. Most home equity loans come with a fixed interest rate and a fixed-rate monthly payment. If you default on this type of loan, you can lose your home.
2) Home Equity Line of Credit (HELOC)
With a HELOC, your home is also used as collateral. Obtaining a HELOC enables you to tap into your home equity. It is also a revolving line of credit since you can withdraw funds from the credit limit that you’ve been approved for.
Most HELOCs come with a variable interest rate and require borrowers to repay the loan or principal at the end of the draw period. Homeowners can also pay the principal during the draw period, but they are only required to make interest-only payments during this period. You should have at least 15 to 20% equity in your home to qualify for this type of loan. Just like a home equity loan, you can lose your home if you don’t repay the loan or default in payments.
3) Downsizing
Downsizing enables you to sell off your existing home so that you can remove the equity in your present home and use part of it as a downpayment for an affordable home. You can use the remaining balance to pay for other necessities.
4) Cutting expenses
Having a solid financial plan will help you save money. Cut your expenses, avoid unnecessary shopping, and budget wisely for weekly or monthly spending. Through a community for the elderly, like the Administration for Community Living, you can get access to information about long-term care planning, Medicare and Medicaid, community living, and other helpful resources.
5) Refinancing a mortgage
You have the rate-and-term refinance and cash-out refinance. If you still have an outstanding mortgage balance, you can refinance the loan to get a better mortgage term or cash out some funds. With the rate-and-term refinance option, the lender will use the newly refinanced loan to pay off the existing loan so that you’re left with the new mortgage loan that comes with a more preferred term or rate.
A cash-out refinance can help you pay off your existing mortgage with a new and bigger mortgage loan so that you have a new mortgage loan and can receive the difference from the lender in cash. You can shop for a loan with an affordable interest rate, fixed rate, or variable interest rate.
Can I Lose My Home On A Reverse Mortgage?
Yes, you can lose your home if you don't pay property taxes and homeowners insurance. You can also lose ownership of your home if you don't maintain the home or have not resided in the home for over a year. The lender puts these measures or obligations to mitigate the risk they will bear on the reverse mortgage loan.
What Are The Ways To Receive A Reverse Mortgage Loan?
With a reverse mortgage loan, you can access funds through different means. This section will highlight it all.
🌀Lump sum
With a lump sum, you receive the complete amount of the reverse mortgage loan that you're approved for in one setting. So, if you have been approved for a loan of $40,000, you receive it all at once. The interest rate of a lump sum is fixed.
🌀Term payments
A term payment helps a borrower to receive equal monthly payments within a specific period that the borrower prefers. For example, some reverse mortgage loans can have a term of 10 years, which means you can receive equal monthly payments from the lender for up to 10 years.
🌀Equal monthly payments (tenure payment plan)
With this option, if at least one borrower continues living in the home as their primary residence, they will continue receiving equal monthly payments from the lender.
🌀Line of credit
With a line of credit, you can borrow funds whenever you need to. You will need to pay back interest on the amount you borrowed or withdrew from the line of credit.
🌀Equal monthly payments with a line of credit
If you or a co-borrower lives in your primary residence, you or the co-borrower can receive equal monthly payments and also benefit from the line of credit if you need extra funds.
🌀Term payments with a line of credit
With this option, you can receive equal monthly payments for a specific time frame that you choose (i.e. 10 years), and if you still need extra funds during or after the term ends, you can withdraw from the line of credit.
What Can I Do To Avoid Reverse Mortgage Scams?
Unfortunately, scam artists target the vulnerable population. So, before you apply for a reverse mortgage loan, verify the license of the lender by visiting the National Mortgage Licensing System (NMLS) search page. Don't fall for fake scams promising to give you a reverse mortgage loan with very sketchy requirements. If the reverse mortgage lender seems pushy or sends you an unsolicited offer, it is most likely a scam. Read more about how to avoid reverse mortgage scams and find legit lenders.
FAQ ABOUT REVERSE MORTGAGE
🌀Can you refinance a reverse mortgage?
Yes, you can refinance a reverse mortgage to get better loan terms and an affordable interest rate and to add your spouse or partner to the reverse mortgage loan.
🌀Is a reverse mortgage costly?
Reverse mortgages like HECM can be expensive due to the different costs it comes with. Costs like third-party fees, MIPs, origination fees, and others. Proprietary reverse mortgages have higher interest rates since they are privately owned and not backed by the government.
🌀Do I need to repay a reverse mortgage?
It depends. Certain conditions may occur that will require you to pay the reverse mortgage loan or cause the reverse mortgage loan to become due.
Here are the conditions:
- If you don't maintain the home property.
- If you decide to sell the home.
- If you pass away.
- If you are away from home for over 12 consecutive months in a healthcare facility, and no co-borrower or eligible non-borrowing spouse lives in the home.
- If you stop paying property taxes or homeowners insurance.
- If the home is no longer your principal or primary residence.
🌀Can my heirs keep the home after I pass?
If you don't have a co-borrower or an eligible non-borrowing spouse, then your heirs will need to pay the reverse mortgage loan in full before they can keep the home. If they need to sell the home, they'll need to repay the remaining mortgage balance or at least 95% of the home's appraised value if the loan balance is more than the value of the home.
🌀Will the reverse mortgage become due when I pass?
It depends. If you pass, and there is no co-borrower on the reverse mortgage loan or an eligible non-borrowing spouse living in the home, the reverse mortgage loan will become due.
🌀Who benefits most from a reverse mortgage?
A reverse mortgage is ideal for homeowners who don't have a lot of funds but own at least 50% equity in their home. It is also ideal for those who want to live in their homes for a long time.
Final thoughts
With a reverse mortgage loan, homeowners who are 62 years and above can access their home equity. Before applying for a reverse mortgage loan, ensure you meet the requirements for the reverse mortgage loan. Obtaining a reverse mortgage loan will help you with additional funds for medical bills, emergency needs, home improvement, and other needs you'll need to cater to.
Reverse mortgage counseling will give you all the necessary information you need to know about reverse mortgages. If you want to be certain whether a reverse mortgage loan is suitable for you, dial 800-569-4287 (HUD's interactive voice system). Prepare for a counseling session by getting familiar with some of the questions you can ask a reverse mortgage counselor.
Do you need engaging and well-researched finance articles? Get in touch with me. I can help you with your content needs.
