A reverse mortgage is a loan usually for homes, that doesn’t always require the borrower to make any payments. It is for people 62 or older, who need capital to pay off another mortgage, build capital, or pay for healthcare bills.
They can help to turn a portion of your home’s equity into cash without having to sell it or face extra monthly expenses. Let’s review how they work, the different types and what to consider when looking into a reverse mortgage.
How Does a Reverse Mortgage Work?
If the borrower were to die, move out or sell their home, the whole amount of debt will become due at that time. According to federal rules, lenders must arrange loans so that the debt amount does not surpass the home’s worth.
The creditor or borrower’s estate will not be held accountable for the discrepancy if the loan balance exceeds the home’s value. A reverse mortgage can deplete the equity in your house, which would leave you with no assets.
You should learn about the various forms of reverse mortgages and compare lenders before choosing one.
Can Anyone Take Out a Reverse Mortgage Loan?
A reverse mortgage is available exclusively to homeowners over the age of 62. Your house must be your primary residence, which means you must spend most of your time there.
In order to qualify you must own the home outright or have a lower mortgage balance. You cannot have any unfulfilled federal obligations that you owe, such as unpaid taxes or federal student loans.
Also, your house must be in excellent condition. If your home doesn’t meet the appropriate property requirements, the lender will inform you of necessary repairs before you can apply for a reverse mortgage.
What Happens to a Reverse Mortgage When You Die?
When the homeowners move out or die, the mortgage must be paid off. Here are some of the options for repaying the mortgage before or after the death of the creditor.
You can sell the house to pay down the outstanding debt on the mortgage, or sell the house for less than the amount owed on the mortgage. If you wanted you could also provide a deed in lieu of foreclosure to the investor which would be an easy option because you won’t have to deal with the cost of foreclosure.
After you die, you could have a child taking out a new mortgage on the property. If an heir wishes to hold the property, he or she will either pay off the HECM or take out a new mortgage to offset the reverse mortgage balance.
What’s the Downside to a Reverse Mortgage?
They have many drawbacks, including initial and recurring payments, a volatile interest rate, and high debt balances. Refinancing a current mortgage or taking out a home equity loan are two options for homeowners seeking a reverse mortgage.
How Much Can You Borrow on a Reverse Mortgage?
The amount of money you will borrow is calculated by the amount of equity you have in your house. On average, you usually will not be able to borrow more than 80% of your home’s equity.
Types of Reverse Mortgages
There are many types such as single-purpose mortgages, proprietary mortgages, and home equity conversion mortgages. They all can be a great option for you depending on your circumstances.
Single-Purpose Reverse Mortgages
Single-purpose mortgages are the most affordable. However, very few state and city governments, and non-profit groups, will offer them because they aren’t usually available.
These loans may only be used for one reason, which would be defined by the lender. The lender could specify for example the mortgage only be used to pay for rebuilding costs.
Proprietary Reverse Mortgages
Private loans guaranteed by the firms that produce them are known as proprietary reverse mortgages. They provide you with a greater loan advance if you buy a higher-valued home.
If your house is appraised at a greater valuation and you have a modest mortgage, you might be liable for extra funds.
Home Equity Conversion Mortgages (HECMs)
Home equity exchange mortgages (HECMs) are guaranteed through the federal government and supported through the Department of Housing and Urban Growth (HUD). The amount of money you will borrow with HECM or proprietary is calculated by a variety of factors like age, the value of your home, your mortgage, insurance, and what the current interest rates are.
What to Consider When Choosing a Reverse Mortgage
You must think about important factors such as if you live in a valuable home, are you using the reverse mortgage for home repairs or property taxes, what are the fees involved, and what will be the total cost.
Do You Live in a Higher-Valued Home?
You might be able to borrow more money if you live in a higher-valued home. However, the more money you borrow, the more fees you’ll have to face.
Do You Want a Reverse Mortgage for Home Repairs or Property Taxes?
If you want to use a Reverse Mortgage to pay for home repairs or property taxes, you’ll need to see if there are any low-cost single-purpose loans available in your state. Home repairs for example will not be nearly as expensive as the cost of taking out a loan to become a homeowner.
Compare Loan Fees
Compare the prices and fees with each of the loans available to you. While the mortgage insurance premium is normally consistent, the majority of loan costs such as origination fees, interest rates, and servicing fees, will differ per institution.
Understand Total Costs and Loan Repayment
The Total Annual Loan Payment (TALC) rates reflect the estimated annual gross cost of a reverse mortgage, plus additional costs. A financial advisor can help you determine if this is appropriate for your situation based on the total costs.
Is a Reverse Mortgage for You?
A reverse mortgage is a loan to buy a home, that doesn’t require the borrower to make any loan payments. It’s a solid option to consider if you’re 62 or older and need capital to pay off your mortgage, build income, or pay for healthcare bills.
A financial advisor can help you take out a mortgage and understand the costs and fees associated with it. Financial advisors will act in your best interest and help guide you through difficult decisions.
You should think about consulting a financial advisor to help you manage your finances and make important investment decisions.