How A Reverse Mortgage Works
With a reverse mortgage, instead of the homeowner making payments to the lender, the lender makes payments to the homeowner. The homeowner gets to choose how to receive these payments and only pays interest on the proceeds received. The interest is rolled into the loan balance so the homeowner doesnt pay anything up front. The homeowner also keeps the title to the home. Over the loans life, the homeowners debt increases and home equity decreases.
As with a forward mortgage, the home is the collateral for a reverse mortgage. When the homeowner moves or dies, the proceeds from the homes sale go to the lender to repay the reverse mortgages principal, interest, mortgage insurance, and fees. Any sale proceeds beyond what was borrowed go to the homeowner or the homeowners estate . In some cases, the heirs may choose to pay off the mortgage so they can keep the home.
Reverse mortgage proceeds are not taxable. While they might feel like income to the homeowner, the IRS considers the money to be a loan advance.
Quick Facts For Those Considering Reverse Mortgages
- Homeowners can never owe more than their homes value.
- Lenders cannot force seniors out of their homes.
- Loans become due when the last borrower sells the home, moves out of the home for 1 year or passes away.
- Reverse mortgages do not affect ones Medicare or Social Security benefits but can potentially impact Medicaid eligibility.
- Reverse mortgages can be re-financed therefore a down real estate market should not be a consideration factor.
- Closing costs are from 2% 8% of the loan amount.
- Between 20% -70% of the homes value can be borrowed.
- There are no restrictions on how the money can be used.
For more information about reverse mortgage companies, check out our review.
What Are The Different Types Of Reverse Mortgages
Reverse mortgages are loans available for people who are 62 or older that allow them to tap their home equity while still residing in their homes and without having to make regular loan payments.
In a reverse mortgage, the lender gives money to the homeowner as either a lump sum, fixed regular payment, or a line of credit based upon the value of their home equity, current interest rates, and the homeowners age. Unlike most traditional loans, when a homeowner takes out a reverse mortgage, he or she is not required to make monthly loan payments to the lender. Instead the outstanding loan balance is paid when the homeowner ceases to use the home as his or her principal residence, usually after the homeowner passes away, moves into a long-term care residence, or sells the house.
The three different types of reverse mortgages are home equity conversion mortgages, proprietary reverse mortgages and single-purpose reverse mortgages.
Home Equity Conversion Mortgage
How much an individual can borrow with HECMs depends on several factors:
- Appraised value of the home
- Current interest rates
- Financial assessment of the individuals ability to pay taxes and insurance as they come due and maintain the home
Proprietary Reverse Mortgage
Single-Purpose Reverse Mortgage
Jaxon Kim is an editorial intern with Eagle Financial Publications.
Don’t Miss: How Far Can You Fall Behind On Your Mortgage
Tips To Protect Yourself
- Consult with an independent financial adviser to find out what reverse mortgage package best suits your financial situation and needs.
- If you do not have a financial advisor, discuss your situation with a counselor approved by the US Department of Housing & Urban Development HUD-approved counseling agencies are available to assist you with your reverse mortgage questions. You can call 800-569-4287 to find a counselor in your area.
- Make sure you understand all the costs and fees associated with the reverse mortgage.
- Find out whether the reverse mortgage you are considering is federally-insured. This will protect you when the loan comes due.
- Find out whether your repayment obligation is limited to the value of your home at the time the loan becomes due.
- Make sure any reverse mortgage payments are first made directly to you do not allow anyone to persuade you to sign over the funds to someone else.
- Be wary of anyone who tries to pressure you into a decision that you are not completely comfortable with, such as investing the payments from your reverse mortgage into an annuity, insurance policy, or other investment product, or pressuring you into receiving a lump-sum payment over monthly payments.
- If you are uncomfortable with the reverse mortgage that you entered into, exercise your right of rescission within three days of the closing. A right of rescission allows you to cancel the mortgage within three days of closing without penalty.
An Introduction To Mortgage
Before we learn about the different types of Mortgages, let us first discuss what is a Mortgage and what is its uses.
What is Mortgage?
When property, land or any other commodity is used as collateral to borrow money or to take a loan from a lender, it is known as Mortgage. In simpler terms, when a person borrows money from a lender and signs up an agreement where he/she gets cash in exchange for a real estate property as a guarantee with the bank until the entire amount is repaid is called a mortgage.
A few important pointers related to Mortgage have been given below:
- The borrower and lender both are uncertain about profit/loss in case of a mortgage. The lender is uncertain if the borrower will be able to pay the sum of money back or not and in case the borrower is unable to pay the lender back, he shall be in complete loss of the asset
- If the borrower is not able to pay back the loan amount, the lender has full authority over the mortgaged product
- The one who takes the loan is called a debtor and the one who lends money is called the creditor
- Loan is a contract between the lender and borrower when one lends money and the other borrows it at a certain rate of interest. Mortgage, on the other hand, is a type of loan in which the real estate or property element is added as a guarantee if the mount is not retired to the lender
Further below, we have discussed the different types of mortgages in detail for your reference.
Recommended Reading: Which Is Better 30 Or 15 Year Mortgage
Is A Reverse Mortgage Right For You
While a reverse mortgage offers an easy way to tap into your home equity, its still a mortgage which means you will still have to qualify. Homeowners must be 62 or older, and have a majority of the equity in their home. The property must be the homeowners primary residence, and cant be used as a second home or investment property.
The amount you can take in a reverse mortgage depends on your age, the loan interest rate, and the value of the home. For home equity conversion mortgages one of the types of reverse mortgage insured by the U.S. Department of Housing and Urban Development , the maximum loan amounts range from 47.9% to 75% of the homes appraised value, based on the applicants age.
Reverse mortgages could be an option for homeowners who dont have enough money from retirement plans or Social Security to live comfortably in their older age. Owners can stay in their home and keep their title deed, while getting access to cash for covering living or medical expenses.
Reverse mortgages also offer some tax benefits. Because they are considered a loan, the money is usually not taxable. They also wont affect Social Security or Medicare benefits.
When Do You Pay Back A Reverse Mortgage
In most instances, you dont have to pay back the reverse mortgage loan as long as you live in the house. However, the loan will become due and payable in any of the following situations:
- Death. When you die, your heirs become responsible for paying back the mortgage or reaching an arrangement with the financial institution.
- Selling the property. The loan is paid off with the sale proceeds.
- Living outside the home for one straight year. If you live away from the house for more than 12 consecutive months, you might need to start paying the loan. If your spouse is a co-borrower or an eligible non-borrowing spouse, they could stay in the home without paying back the loan.
- Not paying property taxes or homeowners insurance. All reverse mortgages require that the borrower pay taxes and homeowners insurance. Failure to do so will result in foreclosure. If you are unable to pay, seek a reverse mortgage counselor right away.
- Not maintaining the house. The home needs to be kept in livable condition.
Once the loan is due, you or your heirs need to speak with your lender to determine a time period to settle the loan balance. This time period varies depending on the situation, but it could be as little as 30 days in some cases before the lender begins the foreclosure process.
Also Check: How Can I Get Help With My Mortgage
What Is The Downside Of A Reverse Mortgage
There are a few downsides of a reverse mortgage. When you take out a reverse mortgage it lowers the value of your home equity since youre borrowing against what you already own. For example, if you own $100K of your home and you use $50K in a reverse mortgage, you now only own $50K of your home.
A reverse mortgage could also affect the ownership of your home down the line. If you live with someone and take out a reverse mortgage that you or they cant pay back, they may lose their living arrangements in the event of a foreclosure.
Dont forget that although a reverse mortgage can provide you with a line of credit, you are still in charge of other living expenses like taxes and insurance.
Finally, be wary of who you are borrowing money from. There are private companies or even less legitimate lenders who could take advantage of your situation or lend you something beyond your means.
What Does It Cost To Apply For A Reverse Mortgage
Before closing on a proprietary reverse mortgage under New Yorks Real Property Law Section 280 or 280-a, the only charges a lender may collect from a borrower before closing are an application fee, an appraisal fee, and a credit report fee. That application fee must be designated as such and may not be a percentage of the principal amount of the reverse mortgage or of the amount financed. For a HECM loan, there generally is no separate application fee as that fee is include in the origination fee collected at closing.
Home Equity Conversion Mortgages
Home equity conversion mortgages are federally insured, which means they are backed by HUD. This type of loan is likely to be more expensive than a traditional home loan and comes with high upfront costs. It is the most widely used reverse mortgage because it carries no income limitations or medical requirements, and the loan can be used for any reason.
Counseling is required before applying. This ensures that the homeowner is fully aware of the costs, payment options, and responsibilities involved. Interested parties are also informed about any nonprofit or government-issued alternatives, as long as they’re eligible. There is a charge for the counseling session, which can be paid from the loan proceeds.
After the counseling session, you find out how much you can borrow with a HECM. Your age, the value of your home, and current interest rates determine how much you can borrow. Those who are older and have higher equity are provided with more money. It is also important to owe as little as possible on the home to receive the best results.
What Is A Reverse Mortgage Alternative To Consider
This article is for educational purposes only. JPMorgan Chase Bank N.A. does not offer this type of loan. Any information described in this article may vary by lender.
A reverse mortgage is a loan for homeowners 62 and up with large home equity looking for more cash flow. There are a few types of reverse mortgages, but there are also alternatives that might work better for your needs. For example, if youre approaching retirement age but would like to explore mortgage options, some alternatives including refinancing or a home equity loan may work best.
You May Like: How To Understand Mortgage Payments
A Hecm Loan Lets You Choose Among Several Payment Options:
- A single disbursement option may not be appropriate for everyone, and it typically provides less money than other HECM options.
- A term option is a fixed monthly cash advance for a specific time. Term options are similar to payday loans, but they work more like traditional mortgage payments. You make repayments on your loan each month until youve paid it off in full or the money runs out whichever comes first!
- You may be eligible for a tenure option. This is where you can get monthly cash advances as long as you live in your home!
- With a line of credit option from your reverse mortgage loan, you can draw money at any time and in the amount that suits you. This type of financing limits how much interest is imposed on your loans because it only charges interest for exactly whats been borrowednot more.
- A combination of monthly payments and a line of credit.
You may also be able to change your payment options for a small fee.
HECMs provide bigger loan advances at a lower total cost than proprietary loans do. In the HECM program, borrowers can live in nursing homes or other medical facilities for up to 12 consecutive months without paying back their mortgage debts before they must repay them. Taxes and insurance still have to be paid on your home so that it is maintained while you stay there too!
A federally insured reverse mortgage loan will only allow you to take out up to 60% of your initial principal limit the first year. There are exceptions, though!
Talk To A Mortgage Expert You Can Trust
Before you make any decisions on a reverse mortgage, speak with an expert who knows the ins and outs of everything to do with mortgages. Our trusted friends at Churchill Mortgage will equip you with the information you need to make the right decision.
About the author
Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.
You May Like: How Many Times Can You Pull Credit For Mortgage
Who Should Avoid A Reverse Mortgage
While there are some cases where reverse mortgages can be helpful, there are lots of reasons to avoid them. A reverse mortgage isnt a good option if:
- You cant find a trustworthy lender or a reputable loan program
- You have outside savings or life insurance that you can tap to cover expenses
- You have heirs who want to inherit your property or family members who live with you and who need to stay in the property after the term of a reverse mortgage
What Is A Reverse Mortgage Exactly
A reverse mortgage is a type of loan thats only available to senior homeownersages 62 and olderwho have plenty of home equity .
As with a second mortgage, a reverse mortgage allows you to access your home equity in the form of a lump sum, a line of creditor even a fixed monthly payment.
While reverse mortgages give seniors access to large sums of money, keep in mind, this means theyd be borrowing against their housemeaning theyd lose the house if something went wrong. If that sounds crazy, its because it is.
Recommended Reading: Can I Roll My Down Payment Into My Mortgage
The Private Reverse Mortgage
This is a reverse mortgage that is not insured by the government. As such, it does not come with the same requirements, or restrictions. Over the past few years, weve seen an substantial increase in the number of proprietary products available.
Lenders that offer private reverse mortgages can offer their own loan terms. This can provide a couple of benefits to borrowers.
- Borrowers are not subject to FHA lending limits. This allows them to offer Jumbo reverse mortgages, or those that exceed the FHA lending limit. They can be a good option for borrowers with high home values well above that limit of $822,375.
- Borrowers are not subject to FHA insurance fees. Instead, they will face private mortgage insurance as specified by the lender.
If you have a home valued well above the FHAs threshold, you may want to look into a Jumbo reverse mortgage offered by a private lender. You may also want to speak to a specialist about newer products that are perhaps less costly and more attractive than traditional HECM loans.
Navigating the Three Reverse Mortgage TypesThere are different reverse mortgages for different purposes. If you are considering taking out one of the reverse mortgage types, its a good idea to consult with an experienced reverse mortgage professional. Find out more about which reverse mortgage type may be best for your situation.
What Are The 3 Types Of Reverse Mortgages
Reverse mortgages are a great retirement solution for many homeowners. They allow you to access a portion of your homes equity as cash payments, a lump sum, or a line of credit. This helps many people fund their retirement when other forms of retirement income might not be enough.
But, did you know that there are actually different kinds of reverse mortgages to choose from? Depending on your financial situation and the home you own, you may be interested in different kinds of reverse mortgages. There are main categories of reverse mortgage to think about. In this post, well walk you through them, so you have a better idea of what financial product best suits your retirement plans.
Don’t Miss: Who Has The Best Mortgage Loan Rates