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What Are The Types Of Reverse Mortgages
There are different types of reverse mortgages, and each one fits a different financial need.
- Home Equity Conversion Mortgage The most popular type of reverse mortgage, these federally-insured mortgages usually have higher upfront costs, but the funds can be used for any purpose. In addition, you can choose how the money is withdrawn, such as fixed monthly payments or a line of credit . Although widely available, HECMs are only offered by Federal Housing Administration -approved lenders, and before closing, all borrowers must receive HUD-approved counseling.
- Proprietary reverse mortgage This is a private loan not backed by the government. You can typically receive a larger loan advance from this type of reverse mortgage, especially if you have a higher-valued home.
- Single-purpose reverse mortgage This mortgage is not as common as the other two, and is usually offered by nonprofit organizations and state and local government agencies. A single-purpose mortgage is generally the least expensive of the three options however, borrowers can only use the loan to cover one specific purpose, such as a handicap accessible remodel, explains Jackie Boies, a senior director of housing and bankruptcy services for Money Management International, a nonprofit debt counselor based in Sugar Land, Texas.
How An Equity Release Agreement Works
One option is for one or more investors to buy portions of your home’s equity through a property investment fund. You pay fees which are periodically deducted from the remaining equity in your home. The investor’s share of your home’s equity goes up over time, and yours goes down.
For example, suppose your home is currently worth $500,000. You sell 20% of your home’s equity in return for a lump sum of $100,000. The fee charged by the fund may vary, depending on your circumstances and the agreement. If the fund charges an initial fee of $30,000, it may take $130,000 of your equity to cover both the lump sum and periodic fee.
Additional amounts of equity are deducted each time the periodic fee falls due . The fee is a set percentage of the fund’s equity in your home. So, as the fund’s share of equity increases, the fee goes up.
When the equity release agreement ends, and your home is sold, the fund gets their share of the proceeds. That is, the proportion of your home’s equity they have accrued. You or your deceased estate get the remainder of the proceeds, if any.
The proportion of home equity you keep will reduce over time, and could even go down to zero.
Check your agreement to see what happens if your equity goes down to zero. Make sure you can continue living in your home, until sold by you or your deceased estate.
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How Much A Reverse Mortgage Can Cost
Costs associated with a reverse mortgage may include:
- a higher interest rate than for a traditional mortgage
- a home appraisal fee
- a prepayment penalty if you pay off your reverse mortgage before it is due
- legal fees for closing costs or independent legal advice
The costs will vary depending on your lender. Some fees may be added to the balance of your loan. You may have to pay for others up front.
What Is The Maximum Age Required To Qualify For A Reverse Mortgage
The reverse mortgage is available for those older than 62 years, and there is no maximum age required for one to qualify for the mortgage. Statistics show that adults aged 62 and 75, are actively applying for a reverse mortgage. The older the borrower of the reverse mortgage is, the more he can qualify for, but this is also dependent on the value of the property. This is based on the fact that older people have a lower life expectancy, showing that the life of the loan is relatively shorter.
Another reason why older borrowers of a reverse mortgage qualify for more amounts is the high home equity at the time of application.
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Ways To Receive The Money
There are various ways to get the money you loaned from the lender. The first one is to get it all at once, also known as the Lump Sum. This method has the only fixed interest rate among all the options. It also benefits you more for it offers more opportunities for the homeowner.
You can also receive the money by a tenure payment plan, also known as an annuity plan. The homeowner receives equal monthly payments until the owner decides to move out of the house. If you plan to have a retirement income while staying in your own house for the rest of your life, a tenure plan is best.
Another method of receiving your money is through Term Payment. The lender will pay you monthly for a certain period. The advantage is that you can decide how long you want to receive money the total amount is divided into the agreed time.
Lastly, you can receive your money through a line of credit. The homeowner will be able to borrow the money at any time. The homeowner has to pay the interest only on their borrowed amount.
Do Hecm Reverse Mortgages Have A Minimum Income Requirement
With HECM, there is generally no specific income requirement. However, borrowers are required to undergo reverse mortgage counseling sessions to ensure that they have everything they need to make a well-informed decision as to whether or not they should get an HECM reverse mortgage. In addition, borrowers are required to take a financial assessment test to ensure that they can manage housing-related expenses, such as property taxes and homeowners insurance.
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Reverse Mortgage Vs Home Equity Loan
A home equity loan also known as a second mortgage is a loan of up to 85% of your home equity that you receive as a lump sum, and pay back in fixed installments at a fixed rate. Its more difficult to qualify for a home equity loan than a reverse mortgage, as it requires income and credit qualification. Home equity loan requirements demand a minimum 620 credit score and at least 15% in home equity.
When Reverse Mortgages Are Appropriate For Eldercare
Many seniors are in a situation where they do not have the income or savings to pay for personal care, for home modifications to enable aging in place, or for long term care insurance. However, they do have financial resources tied up in their home ownership. For some of these seniors, a reverse mortgage is a good option. That said, every familys situation is unique, and in some cases, a reverse mortgage is not the best option. Follows is an exploration of varying scenarios and why different families might opt for or against the use of a reverse mortgage.
Single Seniors in Fair HealthReverse mortgages are a good option, as the elderly individual does not require immediate care. Many seniors in this situation will continue to live independently in their home for some years. And they can use the proceeds from a reverse mortgage to buy long term care insurance and / or make modifications to their home. This, in turn, makes the home safer and more accessible, which can prolong or allow them to age at home indefinitely.
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How Much Equity Do You Need For A Reverse Mortgage
Editorial Note: The content of this article is based on the authors opinions and recommendations alone. It may not have been reviewed, commissioned or otherwise endorsed by any of our network partners.
To qualify for a reverse mortgage, borrowers must own their home outright or have significant equity. Exactly how much equity do you need for a reverse mortgage? The specific percentage varies by lender and the type of reverse mortgage, but the general rule of thumb is to have at least 50% equity in your home.
Extra Requirements For Fha Reverse Mortgages
A home equity conversion mortgage is a common type of reverse mortgage, and the only one insured through the Federal Housing Administration . Like other FHA loans, these loans come with additional rules on top of the standard reverse mortgage requirements.
The maximum amount you can borrow with an FHA-insured HECM in 2022 is $970,800, up from $822,375 the year before. Unlike other types of FHA loans, the maximum limit doesnt vary depending on where you live.
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When Does A Reverse Mortgage Make Sense
| Homeowner’s Story | Tom, 70, and Barbara, 68, enjoy a comfortable lifestyle and have substantial retirement savings. However, they’d like to travel more and spend more without worrying about outliving their funds. They own their home free and clear, and it’s currently worth $700,000. |
| Homeowner’s Reverse Mortgage Decision | They choose a HECM line of credit, which requires no annual mortgage insurance as long as it goes unused. The line can grow over time, ready to provide cash if they deplete their retirement savings. This loan provides peace of mind for the couple, allowing them to enjoy their retirement and worry less about overspending. |
| Home Value |
* Any property value greater than $625,500 is calculated at the HECM maximum value.
** If unused, HECM credit lines grow at the loan’s variable interest rate.
Now let’s look at an example where the reverse mortgage choice is not so clear.
* Elimore’s property may be worth $300,000, but it’s subject to a $80,000 loan.
** If unused, HECM credit lines grow at the loan’s variable interest rate.
Now let’s look at a situation where the homeowners are house-rich and cash-poor.
Your Heirs Could Inherit Less
Homeownership is a key path to building generational wealth. However, a reverse mortgage usually requires the home to be sold to repay the debt. When you die, heirs will be required to pay the full loan balance or 95% of the homeâs appraised value, whichever is less. Usually, that means selling the home or turning the property over to the lender to satisfy the debt.
Not to mention, a reverse mortgage eats away at your homeâs equity. By the time it needs to be paid off, there may not even be any equity to be left to your heirs.
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Hecm Principal Limit Factor
The principal limit that you can borrow is the Maximum Claim Amount for your area multiplied by the youngest borrowers age factor. This is actually the gross amount available for your loan, not the amount of money you can actually utilize.
The actual, final amount called the Net Principal Limit includes deductions for Mandatory Obligations, the amount of any required repairs to the home, and possibly a Life Expectancy Set-Aside from the proceeds. LESA is the amount of your equity reserved for paying certain future expenses.
Curious about take-outs and set-asides? The next article in Part 2 of this guide delves into the details.
The Different Types Of Reverse Mortgages And How To Choose A Reverse Mortgage Lender
There is currently only one Reverse Mortgage type that is widely available the HECM Reverse Mortgage. This loan can be used on your existing home or to purchase a new home. Depending on how you take your loan amount, you can opt for either a fixed rate Reverse Mortgage or an adjustable rate Reverse Mortgage .
HECM programs are available from HUD-approved lenders. These lenders must adhere to the rules and regulations structured by Congress. The maximum fees and lending limits for the HECM are set by law.
Additionally, there are a growing number of proprietary products being offered directly by lenders, such as Jumbo Reverse Mortgages. These loan options typically do not have the same costs or restrictions as HUD HECM programs, and they allow high home value homeowners to access more of their home equity..
In most cases, the HECM is the most widely available and appropriate option. But, if you have a higher home value or perhaps want to access a reverse line of credit on top of your existing mortgage, you may want to consider proprietary offerings. Also, in some states there are proprietary options for higher value condominiums that are not FHA-approved for the HECM program.
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What Can A Reverse Mortgage Be Used For
Supplementing retirement income, covering the cost of needed home repairs or paying out-of-pocket medical expenses are common and acceptable uses of reverse mortgage proceeds, according to Bruce McClary, spokesperson for the National Foundation for Credit Counseling.
In each situation where regular income or available savings are insufficient to cover expenses, a reverse mortgage can keep seniors from turning to high-interest lines of credit or other more costly loans, McClary says.
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How Your Age Affects The Amount Available
You must be at least 62 years of age for a reverse mortgage. The Principal Limit of the loan is determined based on the age of the youngest borrower because the program uses actuarial tables to determine how long borrowers are likely to continue to accrue interest.
If there are multiple borrowers, the age of the youngest borrower will lower the amount available because the terms allow all borrowers to live in the home for the rest of their lives without having to make a payment.
Of course there will always be exceptions, but the premise is that a 62-year-old borrower will be able to accrue a lot more interest over his or her life than an 82-year-old borrower with the same terms. Therefore, HUD allows the 82-year-old borrower to start with a higher Principal Limit.
Which Program Should I Choose
There are a couple of different HECM programs to choose from, including fixed rate and adjustable lump sum distributions and monthly payments or lines of credits from which the borrower can draw as needed/desired.
What is right or best is what is right or best for the borrowers individual circumstances.
The fixed rate loan seems attractive to many borrowers but there are several downfalls borrowers must consider.
Namely, fixed rates require a full draw of all sums available. If you do not need all the money to pay off existing liens, HUD requirements on their program only allow a portion of the line to be accessed in the first 12 months and on a fixed rate loan with no subsequent draws available, any amount not available in the initial draw is lost to the borrower.
Also, since fixed rates are often higher than the adjustable rates and since interest rates are one of the determining factors as to how much money a borrower will receive, adjustable rate borrowers most often receive higher benefits in todays interest rate environment.
Finally, the adjustable program gives borrowers more options as to how they will receive their funds .
Borrowers who choose an adjustable rate loan have several options of how to receive their loan proceeds, including a line of credit, monthly payments, or even a lump sum.
The funds still in the line of credit grow annually at the same rate as the interest accrual rate plus the MIP accrual rate on the unused portion.
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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 that 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 that they can keep the home.
Reverse mortgage proceeds are not taxable. While they might feel like income to the homeowner, the Internal Revenue Service considers the money to be a loan advance.
