There are several reasons why a homeowner will opt to take a reverse mortgage on their home. Whether it’s to help supplement income, pay off debts, or fund a project at home, if you have enough home equity, a reverse mortgage can be a great option.
What is a reverse mortgage?
Reserved for homeowners who are sixty-two years or older, reverse mortgages enable the homeowner to borrow against the equity in their home. In contrast to traditional loans, where the mortgagee pays monthly or bi-monthly to the lender, a reverse mortgage enables the homeowner to receive money from the lender.
What types of reverse mortgages are there?
As with most loans, there are several different types of reverse mortgages to choose from. Understanding the terms of the loan for how it will be paid back to the lender once the loan has matured or when your home is sold.
Single purpose
Offered by the state, local governments, and nonprofit organizations, single-purpose reverse mortgages provide lower interest rates and fees. They are not available in all states and have restrictions on how the funds are used—they can only be used for a single lender-approved item such as taxes or home repairs.
Home Equity Conversion Mortgage (HECM):
This US Department of Housing and Urban Development (HUD) government-backed loan is the most common type of reverse mortgage. Though its upfront fees are higher compared to other reverse mortgage programs, it’s more flexible because there are no income or medical requirements, and the funds can be used for anything the homeowner chooses.
Proprietary reverse mortgages:
For high-equity properties, if the amount of money the homeowner wishes to borrow exceeds the current HUD limit of $970,800, they must use a private lender to back the loan. Since proprietary reverse mortgages are not federally insured and the upfront costs are lower than the other types of reverse mortgages, you may be able to borrow more than a HECM.
What are the prerequisites to apply for a reverse mortgage?
- You must be sixty-two years or older
- The home must be your primary residence, i.e., you live there most of the year
- You must own the home outright or have a low mortgage balance, which can be paid off at the time of the closing
- Your home must be in good condition
- You must have no outstanding federal debt such as student loans or back taxes (this money can be used to pay off these debts at closing).
- You must receive counseling from a government-approved agency explaining the pros and cons, the overall reverse mortgage process, and the requirements needed for approval.
What are the costs?
The costs for reverse mortgages can be expensive depending on how you choose to procure the funds. This program enables you to roll all fees and closing costs into your loan. The one caveat is that the required counseling comes with a fee dictated by the National Reverse Mortgage Lenders Association (NRMLA), which must be paid separately at closing. You must also continue to pay the typical homeowner costs like property taxes and homeowners insurance.
How much equity is needed?
To qualify for a reverse mortgage, you must have a minimum of 50 percent equity in your home. If there is a small mortgage remaining on your home at the time of closing, you can still be approved for a loan because the proceeds from the reverse mortgage will pay off that mortgage or any other eligible existing liens. Note: Federal laws regulate reverse mortgages. However, the District of Columbia as well as twenty-four other states in the US have instituted their own rules and regulations. Some have stricter guidelines than federal laws, so be sure to do your research within your state before applying for a reverse mortgage.
What are the interest rates?
Your interest rate depends on the type of reverse mortgage you obtain and whether you decide to take it as one lump sum, a fixed monthly payout, or use it as a line of credit, will depend on how the interest accrues over the life of the loan. You can receive the funds as follows:
Monthly dispersement
You can opt to receive fixed monthly payments for a set number of years with an adjustable interest rate.
Lump sum
This allows you to receive the money all at once—this option is more costly as the interest and fees are paid upfront on the entire loan at closing.
Line of credit
You can use the funds up to the mortgage limit. The interest and fees may be lower since interest is only paid on money used. You can also use all of the money at once or leave some for future use.
One last note: Beware of scammers! Unfortunately, the elderly population is often targeted by scammers and can lose a lot of money as a result. Only work with a lender that has been referred to you by your real estate agent or a family member or friend.
Due to the recent rise in home prices, now could be a good time to explore reverse mortgages. Though this program is beneficial for some, it’s not for everyone so be sure to talk to your real estate agent and trusted lender to determine if this is the right decision for you.
