The term reverse mortgage is ubiquitous these days. It often appears in commercials or shows up in internet searches. But you may not understand what it is exactly.
In short, it’s a unique home loan that allows homeowners to convert some of their home’s equity into cash. This equity that the homeowner has accumulated over the years by paying for their home can now be returned to them in installments. In a typical mortgage situation, the borrower pays the lender and each payment reduces the amount owed and builds the borrower’s equity in the home. With a reverse mortgage, the borrower receives payments from the lender, and each payment increases the loan balance and decreases the amount of equity.
Who grants these loans?
Most of these loans are issued by the Federal Housing Administration (FHA) and are known as Home Equity Conversion Mortgage, or HECM. A HECM is guaranteed by the FHA, so the borrower doesn’t have to worry about not receiving payment from their lender.
Who is eligible for these loans?
To qualify for this type of loan, homeowners must be at least 62 years old and have significant equity in their home. Additionally, to receive an HECM, homeowners must own their homes outright, or the balance they owe on their home must be low enough that it can be repaid with the proceeds of the reverse loan at closing. In addition, the borrower must live in the home and be able to pay the recurring costs associated with the property, including taxes and insurance. Finally, before receiving the loan, borrowers must obtain information from an HECM advisor. The applicant’s home must be a single-family home, HUD-approved condo, or manufactured home that meets FHA requirements, or a two- to four-unit home if the borrower resides in one of the units.
how much can you borrow
The amount a homeowner can borrow with a reverse mortgage depends on their age, the value of the home, and the interest rate on the loan. In most cases, older homeowners have more money to borrow, and the more a home is worth or the more equity the owner has, the more the owner can borrow. Lower loan interest rates also increase a homeowner’s creditworthiness.
How do I get my money?
With an HECM, borrowers have multiple options for how they receive their payments. Borrowers can choose to receive a lump sum payment upon loan approval, or the borrower can take advantage of a line of credit. This line of credit can be used at the discretion of the borrower and can be expanded over time. A borrower may also choose to receive payments in the form of a monthly annuity. A monthly tenure annuity is a monthly payment that the borrower receives for the entire time they live in the home. A fixed-term monthly annuity is a monthly payment that the borrower receives for a period of time that they specify. Borrowers can also combine these options, for example opting for a monthly annuity but also taking some cash at closing. Borrowers can also switch from one option to another for a small fee.
A reverse mortgage can be a beneficial source of income for seniors. By examining the pros and cons of this type of loan, homeowners can determine if it is a good fit for their financial situation.