What Is A Reverse Mortgage And What Does It Mean To Me?
A reverse mortgage is also known as the home equity conversion mortgage (HECM) in the States. It’s a financial product for homeowners who are 62 years old or older, who have accumulated home equity and want to use this to supplement retirement income.
Once compared with a forward mortgage, a reverse mortgage has no monthly mortgage payments to make. However, borrowers are still responsible for paying taxes together with the insurance on the property. Also, they have to use the property as a primary residence.
What Is A Reverse Mortgage?
Reverse mortgages were born opposite to traditional mortgages, where mortgage payments are generally paid on a forward and monthly basis until the mortgage loan is entirely repaid. At its core, the reverse mortgage is a home equity loan designed to help seniors tap into the equity in their homes. This means that the loan is exclusively accessible to homeowners who are 62 or older. Also, the reverse mortgage comes with a unique feature of the forward mortgage.
The forward mortgage comes with a specific flow, where the borrower makes monthly payments to the lender, reducing the loan balance and building equity.
With a reverse mortgage, the borrower receives payments from the lender and doesn’t need to make payments back to the lender as long as she or he lives in the home. However, living in the home is not the only thing that borrower needs to follow through.
The borrower needs to fulfill the payment of taxes and insurance. Of course, with time the loan grows, interest accrues on the loan and the home equity declines over time.
Basically, the mortgage works in the reverse direction of a forward mortgage, which is where the term ‘reverse’ comes from. You know that all loans have to be paid and this one is no different. That being said, with a reverse mortgage, the loan is due once the borrower sells the home or passes away. Besides, the borrower can also choose to pay off the loan at any time. However, in most cases, a reverse mortgage is paid off when the mortgaged home is sold.
Good to know: Reverse mortgages are always designed so that the amount owed cannot top the value of the home.
One of the better sides of the HECM loan is that there are no strict requirements. By far, it’s fairly easy to qualify for a reverse mortgage. You are eligible for a reverse mortgage if:
- You are 62 or older
- You own your home
- You live on-premises
- You have paid off your mortgage loan
- Your property is in good condition
- Your home is a single-family home, condominiums, or a multi-family home
Good to know: You will have to meet with a government-approved financial specialist to check the reverse mortgage is a good fit. This is also a great way to ensure that the borrower isn’t taking on extreme risk.
Additionally, all borrowers must ensure a certain financial assessment to qualify. If you are wondering why the answer is rather a simple one – the assessment makes sure that the borrower can pay for:
- Property taxes
- Basic home maintenance
- Homeowner’s insurance
- Home Owner’s Association (HOA) fees if applicable
How Reverse Mortgage Works?
Simply said, the borrower will make monthly payments to the lender, reducing both the loan balance and building equity.
For example: if a reverse mortgage balance is $170,000, and the house is sold for $145,000, the borrower doesn’t owe the difference.
A reverse mortgage is a great way to tap into your home equity without being forced to sell your home. Therefore, a reverse mortgage can be seen as a form of an alternative solution.
What Are The Borrowing Limits?
The amount of your reverse mortgage is always based on how old you are, than on how much your home is worth and the interest rate that you are initially offered.
In general, your borrowing power becomes higher as:
- You get older. For example: if you are 80 years old you will be able to borrow more than 64 years old. In addition, all factors are equal.
- If you have a higher amount of home equity, or your home is more valuable.
- As interest rates fall.
Bear in mind that everyhting always comes with a set of fees. That being said, know that reverse mortgages aren’t immune from fees. Therefore, you should understand them, look for them or ask when they apply.
With this type of mortgage, you can expect to see origination fees, a third-party fee, and a mortgage insurance premium fee. Therefore, you should think hard if a reverse mortgage is the best choice for you.
Are Reverse Mortgages Right for You?
A reverse mortgage is a rather unique financial instrument designed for specific consumers. A significant number of researches showed that Americans approve the existence of the reverse mortgage. Moreover, a number of them reported that they received the amount of money they expected to receive.
Even more, they reported that the money lasted as long expected or even longer. The best thing that you can do, if you are thinking about a reverse mortgage, is to talk with an FHA-approved counselor. After all, these specialists are trained to counsel older Americans on their next best home-related move.