How does a Reverse Mortgage Work
As many seniors are struggling financially, trying to survive on a fixed income, a reverse mortgage can be a great way of securing some extra money. You’ve probably heard about reverse mortgages and may have seen ads for them on TV. But what is a reverse mortgage? How do they work? You probably have a lot of questions before jumping into one. Let’s try to answer a few of them as we delve into some reverse mortgage basics.
What Is a Reverse Mortgage?
You might be eligible for a reverse mortgage if you’re 62 or older and own a home. Just like refinancing your house, the property is collateral that you borrow against to get an influx of money.
However, with a regular mortgage, you get the money in a lump sum, then make monthly payments until the loan is fully repaid. A reverse mortgage does the opposite. The lender gives you monthly payments, tax-free, for as long as you continue living in your house and paying property taxes on it. It’s not until you die, or move out, that the loan needs to be repaid.
How much are these monthly payments? It depends on a variety of factors, the biggest of which is the value of your home. We at InstaMortgage will then perform a thorough calculation to provide you with an exact figure of how much loan you might qualify for.
How Does a Reverse Mortgage Work When You Die?
What happens when the owner dies with a reverse mortgage? Well, when you take out the loan, someone else also signs on as the one responsible for repayment. Sometimes it’s your spouse, although if both of you are listed as homeowners, it’s better to have you both listed as co-borrowers instead. That way, whichever one of you dies first, the other can continue receiving payments. More likely, the ones handling repayment will be your children or other heirs.
When the last borrower on the mortgage dies, it becomes time for your heirs to settle the loan. Usually, that means either giving the house to the reverse mortgage company or selling it and giving them the proceeds. They may decide that they don’t want to sell the house, in which case, other arrangements can usually be made to repay the loan in the traditional way. However, they should keep in mind that in that case, they’re responsible for the entire amount you’ve received, which, depending on how long you receive payments, could end up being greater than the home’s actual value. Also, understand that if your heirs decide to let the mortgage company sell the home, any proceeds exceeding the loan pay-off (+ cost of selling the home) will come to your heirs.
What Are the Requirements for a Reverse Mortgage?
We’ve already covered the two basic requirements to qualify for a reverse mortgage: You must be at least 62 years old, and you must own your own home. More specifically, you must own significant equity in your home. There is no fixed percentage, and we can evaluate your situation.
Unlike a regular mortgage, you don’t need to meet any income or credit score requirements to receive the loan. However, there are a few other reverse mortgage requirements to be prepared for. First, your house must have been built on or after June 15, 1976.
The house must also be your primary residence. You can’t get a reverse mortgage on a second home or rental home. You must live there, pay property taxes and homeowner’s insurance, and keep it in good repair. If you fall behind in your payments for 12 months or stop living in the house for that time, the loan must be repaid. This includes if you move into a long-term medical care facility.
You must also go through counseling, as approved by the U.S. Department of Housing and Urban Development. It’s a single session, usually around 90 minutes, which goes through the pros and cons of reverse mortgages and ensures that you understand the situation you’re entering and what it entails, both for you and your heirs.
There are a few upfront costs that must be made as well to get your reverse mortgage. There’s a fee for the counseling session, generally about $125. There’s also an origination fee and, most importantly, the mortgage insurance premium. This is typically around 2% of your home’s value, paid upfront. However, if you can’t afford these costs, they can sometimes be taken out of your loan instead. You won’t have to pay the costs out of pocket, but it will lower the monthly amount you get.
How Can I Get the Money?
There are three options for receiving funds from a reverse mortgage. We’ve been talking about tenure, wherein you continue receiving monthly payments for as long as the borrower is alive and living in that home, even if the total amount dispersed exceeds the home’s value.
If your heirs are interested in keeping your home after you’re gone, you might consider instead a term option. In this case, you take out a loan of a specific dollar amount, which is then divided into equal monthly payments, and paid out for a pre-designated amount of time. This keeps the loan from exceeding the home’s value and makes repayment viable without giving up the house.
The third option is a home equity line of credit. Rather than monthly payments being made, the loan amount is placed in an account, which you can draw from at any time, at your own discretion. If you want, you can also split the amount up, placing some in a credit line account and receiving some as monthly payments.
What Are the 3 Types of Reverse Mortgages?
There are three basic types of reverse mortgages.
Single-Purpose Mortgages are loans for a specific purpose, such as repairs on your house. They’re the least expensive type regarding up-front fees and accruing interest. Funded by state governments or non-profit organizations, they’re not available in all states. Since the money is spent on a specific thing, these mortgages can be paid out in lump sums rather than in installments.
Home Equity Conversion Mortgages are the most common type of reverse mortgage and the one you most likely think of when you hear the term. They’re federally insured, and there’s no limit to the amount of money you can receive or on what you can do with the money. Because of this, they also carry with them higher interest rates and other upfront costs. These are also loans that require counseling beforehand. As of 2022, HECM mortgages come with a lending limit of $970,800.
Proprietary Reverse Mortgages come from private lenders rather than federal or state organizations. They’re typically used by people with higher-value homes who want to borrow more money than the federal limit. You can choose to receive your money as monthly payments or in a single lump sum. We can provide reverse mortgages exceeding the FHA loan limit of $970,800 through such a proprietary program.
What Are the Pros and Cons of a Reverse Mortgage?
On the surface, a reverse mortgage might seem almost like free money. However, like any financial matter, there are pros and cons. The pros include extra income and zero tax liability. On the other hand, your heirs will have less to inherit. As homeownership becomes an increasingly difficult goal to reach for each new generation, passing on your home to them helps ensure they’re taken care of, financially, and a reverse mortgage precludes that.
Additionally, a reverse mortgage is predicated on the fact that you can keep up with property taxes, homeowners’ insurance, HOA dues, and any other fees that come with owning your home. If you can’t, then your home may be foreclosed on.
Finally, receiving monthly payments from a reverse mortgage could impact your other benefits, such as Medicaid and Supplemental Security Income. Since these are provided based on calculated need, the extra money could mean the difference between qualifying for these programs and not qualifying. Talk to a qualified professional about this.
Reverse mortgages aren’t right for everyone, but for some, they can be incredibly beneficial. If you have questions or would like someone to explain reverse mortgages in greater detail, with regards to how they can impact you personally, contact us. We’ll help you determine if it’s the right option for you.