A reverse mortgage is a loan for homeowners over the age of 62, and it requires no monthly mortgage payments. A reverse mortgage has the key benefit of allowing homeowners to access the equity that they have earned in their home, and it eliminates monthly mortgage payments. This means that you may be able to use part of the equity in your house to increase your income, pay for expenses, complete home improvements, or use it however you wish.
An easy way to think about a reverse mortgage is to compare it to a conventional mortgage. In a conventional mortgage, a homeowner makes a monthly payment to their lender. In a conventional mortgage, each payment increases the equity in the home. In a reverse mortgage, each payment to you draws upon the equity in the home, providing access to cash that had been tied up in equity. Without ever selling your home, you can access the equity stored in the home.
Since a reverse mortgage is a loan, it must eventually be repaid. Most reverse mortgage loans become due when the homeowner sells the home or passes away, but borrowers always have the option to pay off the loan at any time that they wish. Reverse mortgages are designed so that the amount that is owed cannot be greater than the value of the home. For example, if a reverse mortgage balance is $250,000 and the home is valued at $200,000, the borrower will not owe the difference. This protects homeowners. On the other hand, if the mortgage balance is $250,000 and the home is valued at $300,000, the remaining $50,000 belongs to the borrower or the borrower’s estate.
The vast majority of reverse mortgages are HECM loans, which is a program offered by the Federal Housing Administration. These are federally-backed loans, which means that the federal government guarantees the loan.
There are two other types of reverse mortgages:
- Single-purpose reverse mortgages (Offered by governments and nonprofits)
- Proprietary reverse mortgages (Private loans backed by an issuing company)
Requirements for a Reverse Mortgage
Most reverse mortgages are HECM (home equity conversion mortgage) loans, so these requirements focus on HECM loans. To qualify for a HECM loan, you must be able to meet the following requirements:
- Be at least 62 years or older
- Own your home or have a small amount to pay remaining on your mortgage balance
- Be up-to-date and stay up-to-date on taxes and homeowner’s insurance
- Your home is in good condition
- Complete a free consumer information session provided by the Department of Housing and Urban Development with an approved HECM counselor
Borrowers also need to go through a financial evaluation. The evalutation ensures that borrowers can pay for:
- Property taxes
- Homeowner’s insurance
- Basic home maintenance
- Home owner’s association fees (if required)
How much money can I borrow?
The amount of money that is available to borrow in a reverse mortgage depends upon a few factors.
- Age. As you become older, you are able to borrow more money. For example, a 85 year old can borrow more than a 62 year old.
- Value of home. If your home is more valuable, you can borrow more. For example, if you own a house with a market value of $300,000, then you will be able to borrow more than someone who owns a house worth $100,000. You can also borrow more if your home value has appreciated. For example, if you fully own a house you paid $300,000 for and the market value increases to $350,000, then you can borrow more.
- Interest rates. At lower interest rates, you are able to borrow more. If the interest rate is 2%, you can borrow less than if the interest rate is 6%.
How You Can Receive Your Money
Reverse mortgages are extremely flexible in the way that the money can be received. Generally, there are four basic options to choose from:
- Receive a lump sum of cash at closing
- Receive a check each month for as long as you live in the house. This is called a “tenure annuity”.
- Receive a check each month for a set period of time. You can decide how long this is. This is called a “term annuity”.
- Receive a line of credit that can be used at your discretion. The amount of money available in the line of credit will grow over time.
A borrower for a reverse mortgage does not necessarily need to choose one of these options. You could choose any combination of options to best suit your financial needs. For example, you could take some cash up front and also keep a line of credit open.
Getting Started with a Reverse Mortgage
It is easy to get started with a reverse mortgage. Click here to get an information kit for free and with zero obligation.