What is a Reverse Mortgage?
You might have heard a lot about reverse mortgages lately, and this might have you wondering: What is a reverse mortgage?
Well, a reverse mortgage is a type of loan product that allows home owners age 62 or older receive cash in exchange for the equity in their home without having to sell the home or make any type of monthly payment in return.
When considering the “What is a mortgage” issue, it’s important to gain an understanding of how these financial instruments work. It’s also important to know the different types of reverse mortgages and how they work. This knowledge will help make sure that you get the deal you can.
Unlike a standard mortgage, where you send monthly payments in to a mortgage lender, a reverse doesn’t require you to pay any monthly payments at all as long as you live in your home. In fact, as long as you do live in the home and keep your taxes and insurance payments current, you will not have to worry about paying back the loan. As an extra perk, the money you receive from a reverse mortgage come to you tax-free, and most reverse mortgages don’t have any sort of income restrictions.
Now, you may be asking: “How do reverse mortgages get repaid?” Reverse mortgages are repaid when the last home owner to sign on the loan passes away, or when you sell your home, or when your home ceases to be your primary residence.
Different Kinds of Reverse Mortgages
As with most financial products, especially mortgages, there are several varieties of reverse mortgage. Actually, there are three, and we’ll discuss them for you here.
- Type 1: Single-purpose Reverse Mortgages
- Type 2: Federally-insured Reverse Mortgages
- Type 3: Proprietary Reverse Mortgages
Single-purpose Reverse Mortgages
Single purchase reverse mortgages are your most cost effective option. They are not offered by every lender in every location, and they’re limited to only one kind of use. How you may use this type of loan is regulated by the government or non-profit lender that lends the money. In many cases, these types of reverse mortgages are used to pay off property taxes or make specific home improvements and repairs. If you’re at a lower or moderate level income, these types of reverse mortgages may be your best and most affordable option.
Federally-insured Reverse Mortgages
Federally-insured reverse mortgages are also known as Home Equity Conversion Mortgages (HECMs) and represent the oldest and most widely used reverse mortgage product. HECMs have been available since 1989 and are insured by the Federal Housing Administration (FHA. The dollar amount you can receive from this type of reverse mortgage is based on your age, the appraised value of your home, and the interest rate you are able to secure. In short, the older you are, and the more equity you have in your home (the closer you are to paying it off), the more money you are likely qualify for. At present, the maximum loan limit for HECMs is set at $625,500.
Proprietary Reverse Mortgages
Proprietary reverse mortgages are private loans that are backed by the companies that develop them. They’re typically meant for homes with appraised values of over $1,000,000 and are no longer widely available. In general, HECMs and proprietary reverse mortgages have upfront costs that run higher than normal home loans.
Some Facts about Reverse Mortgage Costs
If you plan to stay in your home for only a short time longer, or you are considering borrowing a small amount, a reverse mortgage may not be the best choice for you. This is mainly because the upfront costs associated with reverse mortgages can be high, and you want to be sure the amount you’re taking out on the home is justified vs. these expenses. This said, HECM loans are the most popular types of reverse mortgage.
Counseling Required to Make Sure You Understand Your Options
Before you apply for a HECM, you have to meet with or talk on the phone with a counselor from an independent government-approved housing counseling agency. This professional explains the your loan’s costs and financial implications, and they provide you with potential alternatives to a HECM, like government and nonprofit programs or a single-purpose reverse mortgage.
You work together and compare the costs of different kinds of reverse mortgages and the counselor explains how different payment options, fees, and other costs impact the total cost of your loan over time.
Reverse mortgage counselors can be found by visiting the Hud Website’s HECM Counseling Look Up area or placing a call to 1-800-569-4287. You will typically pay a fee of around $125 for their services. Typically, this fee can be paid from the loan proceeds, but you cannot be turned away if you can’t afford the fee.
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