What is a Reverse Mortgage?
A reverse mortgage is very popular cash-out loan for qualified senior citizens. The reverse mortgage loan operates in a way where the homeowner’s debt to the lender doesn’t decrease but increases gradually. This is due to the accumulation of interest and fees added to the loan balance every month. As your loan balance grows, your home equity diminishes. It’s essential to note that a reverse mortgage is not a source of free funds.
Reverse Mortgage Guide
The average Social Security check is a mere $1,701 per month, so many older Americans struggle with how to pay bills during a period of high inflation. To increase their incomes, some decide to tap the equity in their home to pay for their monthly living costs. This is called a reverse mortgage.
A reverse mortgage is made for older people – you have to be at least 62 to get one. It can be a helpful financial tool, but it can work against you if you don’t fully understand reverse mortgages. This guide will explain the ins and outs of reverse mortgages. If you have questions, talk to a loan professional to answer them and to apply for a reverse mortgage.
Reverse Mortgage Overview
A reverse mortgage is a loan that lets borrowers 62 and older who have usually paid off their home to borrow against their equity. The lender will make regular monthly payments to you to live off of, pay medical bills, etc.. The money comes to you tax-free.
How Is A Reverse Mortgage Different From A Regular Mortgage?
With a regular mortgage, you typically borrow money to pay for the house at the time you buy it. Then, it is paid back monthly over time, usually 15 or 30 years. With every payment, your equity increases and the loan balance decreases.
A reverse mortgage is different. The money borrowed uses your home as collateral for the loan, like a regular mortgage. But a reverse mortgage is repaid when you no longer live in the home. You will not make monthly payments, but you must continue paying homeowners insurance and property taxes, and keep up the home. Interest and fees are added to your loan balance every month, so the balance increases over time.
Most reverse mortgage borrowers own their home free and clear. But they might not be able to borrow the whole home value even if their mortgage is paid off. The limit on a reverse mortgage depends on the age of the youngest mortgage applicant, current HELOC rates, the current HECM mortgage limit – $1,089,000 in 2023, and the value of the home.
A reverse mortgage holder is more likely to get a higher principal limit the older they are and the more the home is worth. Having a lower interest rate also helps. The amount could increase if you have a variable rate on your mortgage.
If you have a variable rate, there are typically these options:
• Monthly payments to you are equal, assuming at least one borrower lives there
• Monthly payments are equal for a fixed period of months with an agreement ahead of time
• A line of credit that can be tapped until it runs out
But if you select a reverse mortgage with a fixed rate, you get a lump sum payment.
Why Do People Get Reverse Mortgages?
Most people get a reverse mortgage to increase their retirement income, cover home repairs, or pay for medical costs. In a situation where savings and regular income are not enough, a senior can use a reverse mortgage as a cash-out loan to avoid turning to high-interest debt to pay their bills.
What Are The Requirements For A Reverse Mortgage?
To get a reverse mortgage, you have to be at least 62 in most cases; a few borrowers may let you get a reverse mortgage if you as young as 55. Other requirements are:
• You have to own the property free and clear or at least paid half of it off.
• It must be your primary residence.
• You cannot be behind on federal debt.
• You have to have the money to continue to pay property taxes and homeowner’s insurance.
• You have to complete a HUD information session on reverse mortgages.
Experts caution that you should use care to make maximum use of the loan by setting up a budget so you don’t run out of funds too quickly.
Kinds Of Reverse Mortgages
There are several types of reverse mortgages. Talk to your loan advisor about which one fits your financial and life needs:
• Home Equity Conversion Mortgage (HCEM): The most common kind of reverse mortgage, this is a federally backed loan that may have higher upfront expenses. But the loan funds can be used for any reason. You also have choices about how to get the money – fixed monthly payments or a line of credit. HCEMs are only offered by lenders approved by the FHA.
• Proprietary reverse mortgage: This is a private mortgage and not guaranteed by the US government. You can usually get a bigger advance from this type of loan, especially if your home is worth more.
• Single-purpose reverse mortgage: This type is less common and is usually sold by nonprofits and state and local governments. This is the least expensive of the options but you can only use the money for a limited purpose, such as making the home handicap accessible.
What Does A Reverse Mortgage Cost?
One of the downsides of a reverse mortgage is the closing costs – they aren’t cheap. But most HCEM mortgages let you roll the costs into the loan so you don’t pay money upfront. But this will reduce the amount of money you receive. A typical breakdown of HCEM charges and fees are:
• Mortgage insurance premium (MIP): If you had an FHA loan in the past, you probably remember MIP. There is a 2% MIP with a reverse mortgage at closing, as well as a yearly MIP of .5% of the loan balance. MIP can be financed into your reverse mortgage.
• Origination fee: To process the loan, the lender will charge $2,500 or 2% of the initial $200,000 of the house value, plus 1% of anything over $200,000. The fee cannot be more than $6,000.
• Servicing fees: Lenders may charge a monthly fee to maintain the HECM for the life of your loan. But the servicing fee cannot be more than $30 per month with a fixed rate loan.
• Additional fees: There could be additional fees, such as for home inspections, appraisals, title search, credit check, and a recording fee.
When comparing your reverse mortgage options, review all fees and charges. They can vary considerably by loan product. Also, rates for reverse mortgages are higher than for regular mortgages, which will increase your costs. Rates depend on the current market, your credit score, and other factors.
Is A Reverse Mortgage A Good Fit For You?
A reverse mortgage can be an excellent financial tool to assist a homeowner who wants more income after age 62. Many older Americans use the funds from a reverse mortgage to supplement their Social Security and other retirement income, pay for medical costs, pay for medical care at home, and make home modifications and improvements. In one sense, it’s free money. You don’t have to pay taxes on it, there are no monthly payments, and charged interest can be rolled into the balance. For many people, a reverse mortgage lets them stay in their home in their 60s, 70s, and beyond.
However, reverse mortgages have downsides to think about. Just because you aren’t making monthly payments does mean you aren’t paying interest. So, when the balance comes due, it can startle you with how high it is, especially if you didn’t make monthly payments.
If the balance on the loan exceeds the home’s value when you die or leave the home, your heirs may have to give the home back to the bank. There also are possible issues with others who live in the home with you if they are not on the loan.
Also, while there are legitimate reverse mortgage lenders, there are unscrupulous lenders who pray on desperate older people who need money. You need to be sure you only deal with legitimate lenders who have your best interests at heart. In the end, making a decision about getting a reverse mortgage is complex, and you should carefully go over the concept with your spouse, lender, and possibly a financial planner and tax advisor.
Another wise avenue is to go over the reverse mortgage concept with a nonprofit agency specializing with these loans before signing the dotted line. If you take all of your advice from a sales professional whose income depends on selling these products, you probably are not going to hear the entire story.
Last, there are alternatives to reverse mortgages that could be appropriate for your situation. A home equity loan or home equity line of credit (HELOC) also could get you the money you need. These are second mortgages that may let you borrow up to 85% of your home’s value. Which is best depends on your financial situation, risk profile, and use for the money. A HELOC has a variable rate and is a line of credit, while a home equity loan has a fixed rate and provides a lump sum of cash.
Your loan advisor can speak to you about a reverse mortgage, HELOC, or home equity loan today. Each loan has its advantages and disadvantages, so think carefully before deciding.
Here are the eligibility criteria for obtaining a reverse mortgage:
You must have reached a minimum age of 62.
Reverse mortgages are only applicable to your primary residence, and not secondary residences or vacation homes.
To secure a Home Equity Conversion Mortgage (HECM), the U.S. Department of Housing and Urban Development (HUD)mandates attendance at a reverse mortgage counseling session. Additionally, a financial assessment is conducted to verify your ability to meet the financial responsibilities associated with the loan.
It’s imperative that you do not have outstanding federal debts, such as student loans or income tax obligations.
The property must meet the specified property standards.
Reverse Mortgage Requirements
Homeowners seeking a reverse mortgage or home equity conversion mortgage will be responsible for various additional charges. These expenses can be covered either with cash or by utilizing funds from the loan.
Homeowners seeking a reverse mortgage or home equity conversion mortgage will be responsible for various additional charges. These expenses can be covered either with cash or by utilizing funds from the loan. Some of the anticipated fees include:
Housing counselor: As mentioned earlier, obtaining an HECM loan necessitates consultation with a professional from a HUD-approved counseling agency. Costs for this service can vary.
Mortgage insurance premium: This premium is separate from your standard homeowner’s insurance and guarantees that you will receive the anticipated loan advances.
Servicing fees: These charges enable your lender to manage the administrative aspects of your account.