What is a reverse mortgage?

A reverse mortgage is very similar to a traditional mortgage. Certainly, they are both loans against a property. However, there are some distinctive elements that set them apart. Hence, this article tries to pinpoint key differences and similarities between a traditional mortgage and a reverse mortgage.

Similarities

A reverse mortgage loan, similarly to a traditional mortgage, offers homeowners the possibility to borrow money against their homes. Thus utilizing their homes as security for the loan.

In addition, just like a normal mortgage, when you take out a reverse mortgage loan, the title to your home remains in your name.

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Differences

Contrary to a traditional mortgage, borrowers don’t make monthly mortgage payments. Indeed, in the case of a reverse mortgage, the loan is repaid when the borrower no longer lives in the home.

One of the major differences between both mortgage structures is the payment system. Actually, in a traditional mortgage arrangement, the amount the homeowner owes goes down over time. But a reverse mortgage loan is the opposite. Instead, the amount the homeowner owes to the lender goes up, not down–over time. This is because interest and fees are added to the loan balance each month.

Also, in a reverse mortgage, your loan balance increases and your home equity decreases. 

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Impact

A reverse mortgage is a loan where borrowed money + interest + fees each month = rising loan balance. Because it is a very complex mortgage system, that puts money in your hand now by differing your mortgage payment. Yet, eventually, the homeowners or their heirs will have to pay back the loan when the homeowners die usually by selling the home. However, if the surviving spouse wants to keep the home, he or she will have to repay the loan through other means, possibly through an expensive refinance.

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Usually, only one spouse might be a borrower. This typically happens if only one spouse holds title to the house. Ideally, both spouses will be borrowers on the reverse mortgage. That is because, when the first spouse dies, the other can continue to have access to the reverse mortgage proceeds and can continue living in the house until death. Notwithstanding, the nonborrowing spouse could lose the home if the borrowing spouse moves out for a year or longer.

Target

Reverse mortgages are for seniors age 62 and above. Normally, it provides much-needed cash for seniors whose net worth is mostly tied up in the value of their homes. Typically, it is a great way financial nest for retirement.

However, if a spouse is under 62, you may still be able to get a reverse mortgage if you meet other eligibility criteria. For example:

  • You must own your home outright or have a single primary lien you hope to borrow against.
  • Any existing mortgage you have must be paid off using the proceeds from your reverse mortgage.
  • You must live in the home as your primary residence.
  • Property taxes, homeowners insurance, and other mandatory legal obligations, such as homeowners association dues must be current.
  • You must participate in a consumer information session led by a HUD-approved counselor.
  • Maintain and keep your property in good condition.
  • The home must be a single-family home, a multi-unit property with up to four units, a manufactured home built after June 1976, a condominium, or a townhouse.
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Types of Reverse Mortgages

There are three different types of reverse mortgages. Nevertheless, the most common is the home equity conversion mortgage or HECM. Indeed, the HECM represents almost all of the reverse mortgages lenders offer on home values below $765,600. But if your home is worth more, you can apply for a proprietary reverse mortgage.
Regardless, if you choose to apply for a reverse mortgage you can choose to receive your proceeds in six different ways:

  1. Lump sum

    Get all the proceeds at once with a fixed interest rate.

  2. Annuity

    In this arrangement, the lender will make steady payments to the borrower.

  3. Term payments

    The lender gives the borrower equal monthly payments for a set period of the borrower’s choosing, such as 10 years.

  4. Line of credit

    Money is available for the homeowner to borrow as needed. The homeowner only pays interest on the amounts actually borrowed from the credit line.

  5. Equal monthly payments plus a line of credit

    If the borrower needs more money at any point, they can access the line of credit.

  6. The association of term payments plus a line of credit

    As a borrower, if you need more money during or after the term, you can access the line of credit.

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Why would someone get a reverse mortgage?

Generally, the mortgage is very useful when you are 62 and older. Indeed, most people are usually, on retirement at that age range. So, to get some additional financial flexibility during that period of their life most seniors get a reverse mortgage. It is recommended to take a reverse mortgage for the following purposes when you hit that age:

  • Get additional income
  • Pay for healthcare expenses
  • Pay additional monthly bill
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Who owns the house in a reverse mortgage?

Actually, the home and any equity in the property belong to you or your heirs. You are taking an equity loan from your home but you are not making any payments. However, your balance goes up and your home equity goes down.

Can you lose your home with a reverse mortgage?

The short response is affirmative. However, this can only happen if the homeowner does no longer use the home as a primary residence or if he or she moves or sells the house.

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How do you pay back a reverse mortgage?

Typically, the most common approach utilized to pay back the mortgage is by selling the house. In this case, the proceeds received from the sales are used by the homeowner to repay the loan in full. If there is any remaining equity the homeowner or the heirs get to keep it.

Can a family member take over a reverse mortgage?

Normally, you can’t add a family member to any current loan.

How do you pay off a reverse mortgage early?

In generall, the mortgage can be paid off early without nay restriction. Follow these basic steps if you are looking to pay your reverse mortgage early:

  • Refinancing with a traditional loan
  • Paying the difference between how much was borrowed and how much is owed on the home.
  • Sell the home
  • Take out a new mortgage
  • Provide a deed in lieu of foreclosure
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Who is not eligible for a reverse mortgage?

This type of mortgage might sound appeling for some seniors but it comes with some eligibility requirements. Infact, to be eligible your home must be your primary residence. Secondary and vacation home are not eligible. In addition, you must own the home without any restrictions or at least have full access to at least 50% of the home equity.

Do you pay interest on a reverse mortgage?

The money you borrowed must be reimbursed as well as interest and fees. Moreover, you need to keep in mind the amount you owe will grow over time instead of going down like regular mortgage.

What is the true cost of a reverse mortgage?

Typically, the origination fees on the mortgage for the lender is considered as a compensation for processing the loan. Usually, the fee is equal to either $2,500 or 2% of the first $200,000 of your home’s appraised value plus 1% of your home’s value above $200,000.

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What is the maximum amount of a reverse mortgage?

The recently updated HECM , which is the government-insured Home Equity COnversion Mortgage has a maximum limit of $822,375 regardless of how high your home value gets appraise.

Are funds from a reverse mortgage taxable?

Commonly, this mortgage type proceeds are treated as a loan not an income. As a result they are not taxable. In addtion, any interests accrued are only deductible when you pay off the loan in full.

How old do you have to be to be able to do a reverse mortgage?

The most common type which government insured also known as Home Equity Conversion Mortgages (HECMs) are only available for people age 62 or older. However, if you are less than 62 but at 60 you can elect to seek a private program that offers the same type of mortgage. In this case there is no mortgage insurance required.

What percentage of equity can you get on a reverse mortgage?

Ordinarily, it is common practice that you will need at least 50% equity. The percentage is based on your curent home’s value after appraisal to quality for a reverage mortgage.

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