Reverse mortgage loan – what is it and all you need to know about it.
But, what’s the solution? For some, a reverse mortgage might be the ticket to securing a better life at retirement.
What Is a Reverse Mortgage Loan?
A reverse mortgage is a loan that homeowners who are 62 or older and have paid off their mortgage can take against their home’s equity as a tax-free* lump sum, line of credit, or fixed monthly payment.
It is not like a regular mortgage in which the homeowner makes payments to the lender. Instead, the lender pays the homeowner.
Homeowners who go for this type of mortgage don’t have a monthly payment. Plus, none is requairing them to sell their home (which means they can still live in it). But, the loan must be repaid if the borrower passed away or moves out or sells the house permanently. Borrower must still pay taxes, insurance, and maintain the home.
Who Is Eligible For a Reverse Mortgage?
The main requirement for eligibility is for the primary homeowner to be age 62 or older. However, if a spouse is under 62, they can still access a reverse mortgage when they meet other eligibility criteria. For example:
• They must: own their home outright or have one primary lien to borrow. Any mortgage they already have been paid off using what comes from the reverse mortgage.
• be current on payment for property taxes, homeowners insurance and other mandatory legal obligations, like homeowners association dues.
• live in the home as their permanent residence.
• have attended a HUD-approved counseling session.
• The property must be in top condition.
• As well as the home must be either a single-family, a multi-unit property of a 2 to 4 unit dwelling, a condominium, a house built from June 1976 onward, or a townhouse.
What Are The 3 Types Of Reverse Mortgage?
There are three different types of reverse mortgage loan, and each one satisfies a different financial need.
• Home Equity Conversion Mortgage (HECM)
This is the most popular type of reverse mortgage loan, which is federally-insured and usually has higher upfront costs. But, the funds are available. Although HECMs are widely available, only lenders approved by the FHA offer them. And, before closing, all borrowers are to receive HUD-approved counseling.
• Proprietary Reverse Mortgage Loan
This is a private, non-government backed loan. And, this type of reverse mortgage lets you receive a significant loan advance, especially if your home is of high value.
• Single-Purpose Reverse Mortgage Loan
Unlike the first two, this mortgage is not typical and offered by nonprofit organizations, state, and local government agencies. The loans, typically for a small amount, can only cover one specific purpose, like a handicap accessible model.
Downsides to Reverse Mortgage
For 62 or older, a reverse mortgage can be an excellent way to get cash if your biggest asset is your home equity. And, if there’s no other way to get enough money for your necessary living expenses.
However, taking out a reverse mortgage loan means that you will be spending a large amount of the accumulated equity on paying interests and loan fees. Also, it may make it impossible for you to pass your home down to your heirs. If a reverse mortgage loan can only provide a short-term solution to financial problems that require long-term solutions, it may be necessary to reconsider.
In situations where you have someone like a relative, friend, or roommate living with you, a reverse mortgage loan will mean that the person won’t have any right to keep living in the house after your passing.
Along, one other problem borrowers run into with reverse mortgage loan is outliving mortgage proceeds. If the payment plan you picked has no provision for a lifetime cash flow, like a term plan or lump sum, or if you use up all your credit line, you might not have any money left when you need it.
How To Shop Around For a Reverse Mortgage
Before shopping around for a reverse mortgage loan, it is advisable to speak with a HUD-approved counselor first. Because, this counselor will help to outline the advantages and disadvantages of this kind of loan. Also, help you to see how your heirs might be impacted after you pass away.
When shopping around, decide what kind of reverse mortgage loan best fits your financial goals. Then, compare different lenders and offers based on the loan terms and fees. The mortgage insurance premiums are the same from lender to lender. But, other costs such as interest rate and servicing fees vary.
Reverse Mortgage Calculator: How Much Equity Can You Access?
Now that you understand what reverse mortgage is and how it works, you may wonder how much you can get from this loan. You may be able to access up to 70% of your home’s equity, depending on the type of reverse mortgage.
Three base factors to receive money from this home loan:
1. The age of the youngest borrower
2. Equity on the home
3. Current interest rate
If you already have an existing mortgage, you may want to subtract that money from your total. Due to the lender will pay off the mortgage first with that money.
Also, if you are planning to use some of your proceeds, you may want to factor in closing costs. Although, they can be rolled into the loan balance.
Use a reverse mortgage loan calculator to get a reasonable estimate of just how much you are likely to get. For instance, using the services of a reverse mortgage loan specialist can give you a more accurate estimate. Although, that will take into consideration your unique lifestyle and financial goals.
This advertisement does not constitute tax advice. As a result, please consult a tax advisor regarding your specific situation.
Fairway is not affiliated with any government agencies. These materials are not from HUD or FHA and were not approved by HUD or a government agency. Reverse mortgage borrowers are required to obtain an eligibility certificate by receiving counseling sessions with a HUD-approved agency. The youngest borrower must be at least 62 years old. Monthly reverse mortgage advances may affect eligibility for some other programs. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply. Equal Housing Lender.