Homeowners have often heard about reverse mortgages as access to loan money to help them get through rough spots in their lives. However, it is vital to really understand not only what a reverse mortgage is but how to work with one and what options are available to you. Before you jump on the reverse mortgage bandwagon, read on to learn more.
What is a Reverse Mortgage?
A reverse mortgage is a loan that uses part of the equity you have in your home. It is available to homeowners aged 62 or older. It’s considered a reverse mortgage because rather than making a payment to your lender, your lender makes a monthly payment to you. And it is limited to a portion of the equity you have in your home, you cannot borrow more than that. The loan is paid back once you sell the home (and is paid by the proceeds of your sale) or if you vacate the home. Although you do receive payments from the lender during your occupation of your home, it is very important to note that you must pay back the loan.
What are My Options?
As with any other kind of loan, there are different types of reverse mortgage loans.
- Home Equity Conversion Mortgage (HECM) – a reverse mortgage that is regulated by US Department of Housing and Urban Development. It is important to note that HECM is not a government loan but it is insured by the Federal Housing Administration.
- Proprietary Reverse Mortgage – privately insured by mortgage companies. Many of these same mortgages are regulated like HECM’s, such as requiring mandatory counseling. These are often offered on higher value homes. With a max of $636,150 for the loan, if you have a multi-million dollar home, you could have a higher loan available to you.
Rates on reverse mortgages vary for both types of loans and often depending on who you get the loan through. It’s best to consult your mortgage lender on what they offer in terms of rates and fees. It is also important to note that at times, the maximum loan amounts increase. Watch those amounts closely and you could maximize your benefit.
What is Required of Me?
As with any loan, there are requirements for the borrower(s) to fulfill.
- Age Requirement – all borrowers on the title must be 62 years of age. If a spouse is under 62 it is possible to still acquire a reverse mortgage. Your lender will be able to determine if you qualify.
- Primary Lien – the reverse mortgage must be the only lien on the home. If you have a mortgage out on the home, the reverse mortgage must first pay it off. Anything left over after that is yours to use at your discretion.
- Occupancy – the reverse mortgage can only be taken out on the primary home. Vacation homes and investment properties are not eligible. If you are unable to live in the home 12 months out of the year (ie: extended work leave or an illness), let your lender know!
- Property Condition – homeowners must maintain the property and complete any mandatory repairs on the property.
- Taxes & Insurance – borrowers must stay current on all property taxes, insurance, and any mandatory fees (such as condominium fees or homeowner’s association fees).
It is possible that there will be other requirements by your mortgage lender. Be sure to ask your lender what they require.
Why Get a Reverse Mortgage?
Of course, one does wonder why exactly would you want a reverse mortgage? Many older folks find success in being able to get the reverse mortgage, sell their home, and then purchase a new home. When they finish closing on the new home they don’t have any mortgage payments to make as everything is settled through the proceeds of the sale. This tends to be successful when the couple is downgrading from a larger, more expensive home to a smaller, less expensive home.
Another option is to afford major renovations to the home that can increase the value of their home. At some point, the home will be sold and you want your home to be worth as much as possible. Using the reverse mortgage is a huge benefit for many people.
Lastly, some older homeowners use the reverse mortgage to increase their investments for their impending retirement. There are many ways to invest for retirement, a reverse mortgage is just one option to consider when bulking up.
It’s important to remember that reverse mortgage is another loan. You will need to check your credit before you apply to make sure you are going to get the best rate possible. While you will not repay it back right away, you will repay it at some point. So be sure that you have clear intentions on how you are using your loan and that your plan includes how to pay it back. If you’re careful, a reverse mortgage can be a big benefit to you!