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 aparts. Hence, this article tries to pinpoint key differences and similarities between a traditional mortgage and a reverse mortgage.

1. Similarities

A reverse mortgage loan, similarly to a traditional mortgage, offers homeowners the possibility to borrow money against their home. 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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2. 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 structure 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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3. 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. Notwhilstanding, the nonborrowing spouse could lose the home if the borrowing spouse move out for a year or longer.

4. 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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6. 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 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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