A reverse mortgage allows homeowners who are 62 years or older to convert the equity in their homes into cash they can use to help cover monthly expenses or fund larger projects. They can use the funds to pay off a traditional mortgage and reduce monthly bills, complete home renovations, cover health care costs, or supplement retirement funds. Understanding what a reverse mortgage is, learning the advantages and disadvantages, and how monthly payments work can help you decide if a reverse mortgage is right for you.
What Is a Reverse Mortgage?
Reverse mortgages are loans made to homeowners who are 62 years old or older. These loans allow you to convert a portion of the equity you have in your home into tax-free cash with no required monthly payments.
There are several different kinds of reverse mortgages, but the Home Equity Conversion Mortgage (HECM) available via the U.S. Department of Housing and Urban Development (HUD) is one of the most common.
Homeowners who qualify for reverse mortgages can borrow money using their house as collateral. The lender provides them with a home equity loan payment either as ongoing payments or as a lump sum based on a percentage of their home’s equity.
What Are Reverse Mortgage Eligibility Requirements?
Applicants must meet several eligibility requirements and guidelines to qualify for a reverse mortgage, primarily the homeowner’s age. Other reverse mortgage eligibility requirements include:
- The property you’re seeking a reverse mortgage on needs to be your primary home, meaning you spend the majority of the calendar year living there.
- You need to either have a very small mortgage balance or own the home you are seeking a reverse mortgage on outright. If you have a remaining balance on your mortgage, you need to be in a position financially to pay that balance off during the reverse mortgage closing. Many homeowners use funds from the reverse mortgage to pay off their traditional mortgage.
- You can’t be delinquent on any federal debt, including federal student loans or income taxes.
- You need to have money set aside either from personal savings or from reverse mortgage funds at closing to pay for things like insurance, property taxes, and maintenance and repair costs.
What Are Reverse Mortgage Costs?
Reverse mortgages aren’t free money. Your mortgage balance will go up when signing up for this kind of loan. Typical upfront and continued costs associated with a reverse mortgage include:
- Origination fees: These are paid to the lender and can’t exceed $6,000.
- Real estate closing costs: These are paid to third parties and can consist of credit checks, mortgage taxes, recording fees, inspections, surveys, a title search, an appraisal, and other fees.
- Fees and interest: These will be added to the balance of your traditional mortgage every month
- Property taxes and homeowners insurance: These are continued costs paid to third parties by the homeowners
- Initial mortgage insurance premium: Your lender will charge initial and annual mortgage insurance premiums that you’ll pay to the Federal Housing Administration. This insurance guarantees you’ll receive the cash advances you are expecting. These premiums differ from homeowners insurance, which you are still responsible for.
You can pay these fees using the money from the reverse mortgage or with the cash you have set aside personally. If you plan on using loan proceeds to pay upfront costs, you won’t have to bring any additional funds to the closing. However, the amount of money you’ll receive from the reverse mortgage will be less.
How Do Reverse Mortgages Pay Out?
How much money is available through a reverse mortgage depends on several things, including:
- Borrower’s age or the youngest spouse’s age when both are on the title.
- The appraised value of your home.
- Current interest rates.
- The $765,600 FHA spending limit if using the HECM program.
When using a HECM reverse mortgage, there are several ways you can receive payments from your reverse mortgage, including:
Line of Credit
Similar to a credit card or home equity line of credit (HELOC), homeowners can access the money as they need it. Accessing these funds generally requires you to submit a written request to the servicer of the loan.
With term payments, you receive a fixed monthly payment for a specific amount of time, such as 10 years. The amount of money you receive each month during this time won’t change. This remains true even if your home loses value during this payment timeline.
You will receive these fixed monthly payments for as long as you live in your home and it remains your primary residence. The payments will only end when you and your spouse, if applicable, pass away or leave your home.
Other reverse mortgage payout options include:
- Modified term/line of credit: A kind of hybrid payment where you get both a fixed monthly payment for a specified period of time and a line of credit you can access.
- Modified tenure/line of credit: This provides you with fixed monthly payments and a line of credit for however long you remain in your home and use it as your primary residence.
- Single disbursement: You can also request a lump sum payment, meaning you will receive all the proceeds of your reverse mortgage at the time of the closing.
How is a Reverse Mortgage Repaid?
You don’t need to repay a reverse mortgage until you leave or sell your home, or until you (and if applicable, your spouse) pass away. However, if at some point your home is no longer considered your primary residence, you will need to repay the reverse mortgage. In addition, you may also have to repay the reverse mortgage sooner if:
- The home falls into disrepair.
- You fail to pay your homeowners insurance or property taxes.
A reverse mortgage lets you convert the equity in your home into cash you can use in various ways. If you’re not sure it’s the right fit, there are alternatives. A Home Equity Investment via Point provides you with a different way to unlock your home equity. Even better, you won’t have to worry about the strict reverse mortgage age requirements or high-interest rates. Unlike with a reverse mortgage, you’ll retain the option to pass down your home with an HEI. Get the cash you need while maintaining full control of your home. See how much funds you’re eligible for with a quick quote from Point today.Tags: Reverse Mortgage