Reverse mortgages are an excellent tool for older homeowners needing additional funds for home repairs, medical bills, or other expenses. These flexible home loans have no monthly payments until the borrower dies or sells the home, which can help homeowners save money while putting their home equity to work.
This article will discuss how a reverse mortgage works, how to qualify, and important disclaimers to ensure you make the most out of your loan.
How Reverse Mortgages Work?
Reverse mortgages allow you to borrow money from your home’s equity. A reverse mortgage works in the opposite way of a traditional mortgage. Instead of repaying the lender after borrowing money, the lender makes payments to you. You can choose how to use the loan proceeds and how frequently you receive your payments.
However, unlike a home equity line of credit or a home equity loan, there is no fixed repayment period; a reverse mortgage loan only comes due if the borrower transfers the property to someone else, such as by passing away or selling the property. You won’t make interest payments, though you are still responsible for other home expenses, like property taxes.
How Funds Are Received
Reverse mortgage loans can be received in several ways. You can choose a lump sum payment, where you simultaneously get the entire loan balance, much like a home equity loan.
You can receive equal monthly payments as income or choose a line of credit where you draw down a loan advance as needed rather than receiving it all at once. It’s also possible to select a combination of these, such as getting one large lump sum and then a monthly payment for the rest of the term.
Types of Reverse Mortgages
There is more than one type of reverse mortgage, making it crucial that you choose the right reverse home loan for your needs.
Home Equity Conversion Mortgage
The Home Equity Conversion Mortgage (HECM) is the most common type of reverse mortgage. These are insured by the Federal Housing Administration of the Department of Housing and Urban Development (HUD). They have additional protections for borrowers and the government backs them. This offers you tax-free income to use during retirement.
Other Reverse Mortgage Types
While most reverse mortgages are HECMs, there are a few other choices you can consider as well.
A HECM for purchase is used when a reverse mortgage borrower wants to use the proceeds from their loan to purchase a brand-new primary residence. Private lenders provide proprietary reverse mortgages and are not insured by the FHA. This is a good option if the loan balance exceeds the maximum amount set by the FHA. A reverse mortgage lender provides single-purpose reverse mortgages for a specific purpose, such as paying off another loan or covering renovations. This may a good option if you do not need fixed monthly payments.
Reverse Mortgage Requirements
There are a few requirements you must meet if you want to take out a reverse mortgage, including the following.
Age
The youngest borrower must be at least 62 years old.
Residency
You can only take out a reverse mortgage on a primary residence, not a vacation home or investment property.
Equity
Typically, you need to have at least 50% equity. If you have an existing mortgage, you must pay it off with the proceeds from your new loan.
Counseling
Reverse mortgage borrowers who want Home Equity Conversion Mortgages (HECMs) must attend counseling with an HECM reverse mortgage counselor to ensure they understand their financial obligations and know how to avoid reverse mortgage scams.
The financial advisor will explain your options and ensure you can afford the expenses associated with the loan.
Property Requirements
Your home must be in good repair, or you must be able to bring it up to a standard through the proceeds of the loan. Additionally, you must be able to pay property taxes and homeowners insurance. Lenders will want to see you have funds in reserve for these costs.
Who Can Benefit from a Reverse Mortgage?
These loans can be very useful tools for a broad range of borrowers, as they offer upfront funds that only need to be repaid if you transfer the property to someone else. They are especially useful for seniors on a limited income who need additional funds to preserve their home or their current quality of life.
Seniors Wanting to Age in Place
Many seniors need to downsize as they age, but taking out a new mortgage means dealing with mortgage insurance premiums and other expenses. Instead, a reverse mortgage can help you make necessary upgrades to your existing home so you can stay in place.
Homeowners Needing to Supplement Retirement Income
A reverse mortgage provides you with tax-free payments that can help supplement SSI or other benefits, helping you stay comfortable in retirement. However, it is important to note that while the mortgage won’t impact Social Security and pension payments, you may lose access to means-tested benefits, like Medicare, if you are making proceeds from the loan.
Those Wanting to Eliminate Monthly Mortgage Payments
You can use the proceeds from reverse loans to pay off the rest of your mortgage, which is particularly useful if you had a variable interest rate that may have been vulnerable to market adjustments.
Heirs Wishing to Preserve the Family Home
If a loved one took out a reverse home loan before death, their heirs can purchase the property by paying off the HECM or 95% of the appraised value. The reverse mortgage cost may be cheaper than its full value, letting them keep their home in the family.
What You Need to Know Before Getting a Reverse Mortgage
It’s critical to consider all components of a reverse mortgage before taking one out, including the following:
- Costs: A reverse mortgage will include servicing fees, origination fees, and other closing costs. You will also have to pay an upfront mortgage insurance premium to the department of Housing and Urban Development.
- Equity: Because you are not making payments, your loan balance grows over time and depletes your home equity. Typically, HECMs have a fixed interest rate, but it’s also possible to get variable interest rates.
- Repayment Terms: A reverse mortgage must be paid back in full when you pass away or move out of the home.
- Government Benefits: You cannot have any federal debt if you want a reverse mortgage. While this is tax-free money, means-tested government benefits like Medicare may be impacted by the funds you receive. Social Security will not be impacted.
Summary
A reverse mortgage is a type of loan that allows you to take money from your home’s equity, and it does not need to be repaid until the borrower dies or moves. An HECM is the most common type of reverse mortgage, but you can also choose a proprietary reverse mortgage or single-purpose reverse mortgage.
Most of these loans are fixed-rate, but variable-rate options are also available. It’s important to undergo counseling and ensure you know the stipulations.
If you’re curious about this loan type, contact a loan officer at Arnaiz Mortgage for more details. We’ll walk you through the process and help you decide whether a reverse mortgage will help you reach your financial goals.
Frequently Asked Questions
When Do You Have to Repay a Reverse Mortgage?
You must repay a reverse mortgage if the borrower no longer owns the property. This includes if the borrower passes away or if they sell the house.
Can You Refinance a Reverse Mortgage?
Yes, it’s possible to refinance this mortgage type. This can be useful if your home value has increased, you want to add a new borrower who recently turned 62, you want to change interest rate types, or you’d like a lower rate.
You can turn a reverse mortgage back into a traditional mortgage if you want to preserve your home’s equity.
You cannot refinance a reverse home mortgage more than once every 18 months. As a rule of thumb, the benefits of refinancing should be more than five times the cost of the refinance.
If you’d like to learn more about refinancing, contact us at Arnaiz Mortgage, and we will walk you through your options.
How Much Money Can You Get From a Reverse Mortgage?
This depends on how much equity you have, your age, and the home’s value. In general, you can get about 40% to 60% of the value through reverse mortgages, though the amount may be higher if you are older. When you speak to our loan officers at Arnaiz Mortgage, we’ll help you determine how much you may be eligible to receive.
How Do I Cancel a Reverse Mortgage?
Borrowers have the right of rescission, meaning they can cancel the mortgage within three days of closing if they change their mind. You will be informed about this during your mandatory counseling session, and the lender should also remind you of this right during the closing.
To do this, you will request to cancel the mortgage in writing by mailing a letter to the lender by certified mail. The lender will have 20 days to return any money you paid upfront.
If it’s been more than 3 days since closing and you want to cancel, you can pay off the rest of the mortgage out of pocket or refinance into a new conventional loan. It’s also possible to cancel the loan by signing the property over to the lender or selling it, paying off the rest of the loan from the proceeds.
You should consider speaking to a financial counselor before making any decisions about your mortgage, as there may be additional options that will allow you to keep your home.