If you are nearing retirement age, you have probably heard a bit about reverse mortgages, even if it’s just through commercials and ads. A reverse mortgage is unlike any other mortgage available. As the name implies, this type of loan works in reverse: you are able to access the equity in your home as a lump sum or line of credit without making loan payments. Only homeowners who have equity and are at least 62 qualify for this type of loan. If you meet the requirements, you may benefit from a reverse home loan.
There are many potential advantages with reverse mortgages. You will never need to repay the amount you borrow except if the home is sold, you move out, or you pass away. Heirs can walk away and surrender the home, but they will not owe more than the house’s value if they want to keep it. These loans also offer flexible terms with many ways to receive your money. This can make it easy to use the loan to finance a new real estate purchase, supplement retirement income, and more.
Reverse loans can be a bit confusing, however. The unique qualifications and rules governing these products are different than any other loan product. Not sure if you should consider a reverse loan? Here’s what you should know about how they work.
What Is a Reverse Mortgage?
A reverse mortgage is a unique loan option designed for seniors who own their own home. A HECM reverse loan is backed by the FHA and allows you to convert home equity into cash in the form of a lump sum, line of credit, or monthly payments. You will never need to make monthly payments on your loan. In fact, no repayment at all is due until you leave or sell the home or pass away. You will still be responsible for paying property taxes, homeowner’s insurance, and maintenance expenses, however, to keep the loan in good standing.
The amount you can borrow will depend on several factors, including the age of the youngest borrower, the appraised value of your home, how much you owe on an existing mortgage, interest rates, and the maximum loan limit. How much money you can access during the first year may also be limited and you may be required to set aside some proceeds to pay for insurance and taxes if the lender feels they may not be affordable.
As with other loan options, there are closing costs associated with a reverse loan. Your home will also need to be appraised before the loan goes through underwriting. Still, the process is usually faster than with a traditional home loan.
[/nextpage] [nextpage title=”Next” ]Who Qualifies For a Reverse Mortgage?
Reverse mortgages have strict eligibility guidelines. To qualify, you must own your home or have a mortgage balance low enough that the loan proceeds can pay it off. You must have sufficient equity to take out a loan. One of the biggest eligibility rules is that you must be at least 62 years old. Due to changes to HECM rules, it is possible to qualify if one spouse is younger than 62. Your lender will also perform a financial assessment to make sure you can keep up obligations. A reverse loan has no loan payments, but you must pay homeowner’s insurance, property taxes, and maintenance on the home. To receive a HECM, counseling is also necessary. You will receive a certificate to prove you completed this mandatory counseling on the benefits and risks of a reverse loan.
[/nextpage] [nextpage title=”Next” ]Benefits of a Reverse Mortgage
A reverse loan comes with many potential advantages:
- Several ways to receive your loan proceeds. You can adapt the loan to fit your needs, whether you want access to money in an emergency, steady monthly income, or a lump sum for a new roof.
- No repayment is necessary until the borrower dies or leaves the home.
- Heirs are not responsible for paying back the loan. Your heirs can get a new loan to pay off the debt to keep the home — and pay no more than the home’s value, regardless of the loan balance. Heirs can also choose to walk away from the property. If heirs sell the home, they will receive any amount left over after paying off the reverse mortgage.
- The proceeds from a reverse loan usually do not affect Medicare or Social Security. The money you receive is not considered income by the IRS.
- The proceeds of the loan can be used for any purpose.
- A reverse mortgage can be used to pay off your existing mortgage.
- Delay taking Social Security until 70, for example, to increase your benefits.
If you’re considering a reverse mortgage, one of the biggest questions you may have is when it should be done. You must be at least 62 to get approved, but this isn’t necessarily the best time to take out a loan. Your loan amount will be determined by several factors, including your age and your home’s value. The older you are, the more you can borrow.
[/nextpage] [nextpage title=”Next” ]What Types of Homes Are Eligible?
- Home prices are high. This allows you to qualify for a larger loan amount.
- Interest rates are low. This also increases your maximum loan amount.
- You need the money. If you want to remain in your house and you need cash flow, a reverse loan can eliminate an existing mortgage and give you a lump sum of money, monthly payments, or a line of credit.
- You are 65+. The older you are, the higher your maximum loan amount.
- You know you want to remain in your home. If your plan to remain at home and downsizing is not a good option, a reverse loan can help.
- You want a backup. You don’t need to use the money right away. A line of credit gives you access to money if you ever need it.
Many types of homes can qualify for a HECM. The most common is a single-family home. You can also qualify with a multi-family home with up to 4 units as long as you use one unit for a primary residence. Most condos qualify for a HECM, but they must be on an approved list with the FHA. It’s also possible for a manufactured or mobile home to qualify, although most do not. To take out a HECM on a mobile home, it must be approved by HUD and meet FHA requirements. This includes being built after 1976, square footage of at least 400 square feet, and a mortgage that covers the home and the land site.
[/nextpage] [nextpage title=”Next” ]Difference Between Reverse Mortgage & Home Equity Loan
Reverse loans are often compared to HELOCs and similar products. There are several similarities between these products as they allow you to unlock your home’s value with a loan amount based on the market value of your home. The repayment schedule with a reverse loan is very different. Rather than making loan payments right away, there is no payment due on a reverse loan until the homeowner leaves the home or dies. There is no risk of losing your home because you can’t keep up with payments. Reverse loans also have stricter requirements in terms of age and counseling.
[/nextpage] [nextpage title=”Next” ]How Do You Receive Your Payments?
One of the biggest advantages of a reverse mortgage is you choose how you want to receive your proceeds. You have several options, including a lump sum, a line a credit, monthly payments, or a combination. You can also switch from one option to another, in most cases. Most HECM borrowers choose a line of credit, which allows you to access your funds only when you need them. A term payment, on the other hand, gives you a fixed monthly payment for a specific amount of time. This can be used to defer Social Security benefits, for example. A tenure payment is similar but it offers fixed monthly payments for as long as you remain in the home, even if the loan balance surpasses the home’s value. Lump sum payments are also popular, especially for financing a big purchase.
[/nextpage]