A reverse mortgage or Home Equity Conversion Mortgage (HECM) allows seniors to borrow money against the equity in their homes without having to make monthly payments. Once the borrower dies or moves out of the home, the loan becomes due in full, and any unpaid interest gets added to the original loan amount. Here’s what you need to know about reverse mortgages, how they work, and who qualifies for one!
What is a reverse mortgage?
A reverse mortgage is a loan that allows homeowners over the age of 62 to access equity in their home. These loans are often referred to as reverse mortgages because they take equity from a property, rather than provide a loan.
The homeowner receives the funds from the lender through monthly payments, which can be drawn out for as long as the homeowner lives in his or her home. Unlike traditional mortgages, which usually require monthly payments with interest, reverse mortgage borrowers only make one lump sum payment when they first receive the loan.
This means there is no interest charged on a reverse mortgage, so homeowners can enjoy an immediate increase in their standard of living without any risk of foreclosure.
Cash in Equity
A reverse mortgage is an option for seniors to use their home equity (the difference between the market value of their home, minus any outstanding mortgage balance, and the assessed property value) as cash in order to supplement retirement income.
With a reverse mortgage, you don’t have to sell your home or take out any additional loans. The process of receiving funds from a reverse mortgage can be broken into two basic steps:
1) The lender will purchase your home equity by issuing you the loan amount equal to the remaining equity in your property. You continue to live in your house as you normally would without making any payments on this new loan that’s been issued against its market value.
2) When you pass away, your heirs inherit your home and there’s no need to repay any money. If you stay in your house longer than expected, you can also sell your home before passing away, at which point you repay any outstanding loan balance. This loan repayment can be made from any new equity that results from selling above current market value.
In some cases, people who receive reverse mortgages are still living in their homes decades after taking out a loan against its equity.
How a Reverse Mortgage Works
A reverse mortgage is a type of loan that can provide you with a source of cash in retirement. It works by converting some or all of the equity in your home into cash for you to use, tax-free. The lender does this by taking legal ownership of your home and then either selling it or renting it out for enough to pay off the loan. A reverse mortgage can be a smart way to make retirement more comfortable, but before signing on the dotted line, consider the following:
How much will I get from my Reverse Mortgage?
The amount you receive depends on a number of factors, including your age, credit score, available equity in your home, etc. Generally speaking, the older you are when you take out a reverse mortgage and how much equity there is in your house at the time of approval dictate how much money will come your way each month.
Types of Reverse Mortgages
There are different types of reverse mortgages, including Home Equity Conversion Mortgages (HECMs) and Fixed Periodic Payment Reverse Mortgages (FRPMs). HECMs are the most popular type of reverse mortgage. The most notable distinction between these two options is that FRPMs require the borrower to make monthly payments during the repayment period, while HECMs do not.
HECM reverse mortgages do not require repayment. However, they also do not offer you any immediate benefit, as you will only receive payments when you move out of your home.
If you remain in your home until death, then your heirs will have to pay off any balance left on your HECM loan at that point. HECMs can also work well for senior citizens who intend to continue living in their homes as long as possible, as they don’t need to make monthly payments during retirement.
Alternatively, FRPMs require you to make regular monthly payments during retirement until you die or move out of your home. These loans are great if you want an immediate monetary benefit from your reverse mortgage.
Who Is a Reverse Mortgage Right For?
A reverse mortgage can be a great way to unlock wealth that has accumulated over the years while still living in your home. They are a good option for those who need cash but have a house that still has some value.
Reverse mortgages are not designed for every homeowner. If you are younger than 62, do not plan to stay in your current home for an extended period of time, or have significant equity in your home, then a reverse mortgage may not be right for you.
What Is Required for a Reverse Mortgage?
A reverse mortgage has a few requirements that need to be fulfilled before being eligible. First, you must be at least 62 years old. Second, you must have a steady income in order to pay the monthly mortgage payments. Lastly, your home must be paid off or you must have sufficient equity in your home.
The borrower then makes a one-time lump sum payment, or series of payments that are made over time, usually monthly, for as long as they continue to occupy their home.
The amount of money available through a reverse mortgage loan varies from lender to lender. A home equity conversion mortgage (HECM) requires no down payment up front. Most lenders require that homeowners be at least 62 years old, have a steady income and show sufficient equity in their homes in order to qualify for an HECM. In some cases, borrowers may also be required to pay closing costs on top of their lump-sum payments or regular mortgage payments.
What Are the Costs of a Reverse Mortgage?
A reverse mortgage can be a great option for seniors with limited income, but you should know what the costs are before you sign on the dotted line. Reverse mortgages can have an upfront cost of around $7,500 to cover title insurance, appraisals and other expenses.
There’s also an ongoing monthly cost of about $50-$200 in order to make sure your home gets fixed up if it starts to fall apart. And there’s a risk that the lender could foreclose on your home if you don’t pay off the loan.
Reverse Mortgage Interest Rates
Most people have heard of the term reverse mortgage but may not know what one is. A reverse mortgage, also called Home Equity Conversion Mortgage (HECM), allows you to convert the equity in your home into cash. The interest rate on a reverse mortgage can be fixed or adjustable, depending on the needs of the borrower.
Borrowers with fixed rates will have an initial set interest rate for as long as they own their property. Borrowers with adjustable rates will get periodic adjustments to their rate based on prevailing interest rates.
An HECM does not require monthly payments like traditional mortgages do, however the homeowner may make payments if they wish to pay off their loan early.
How Much Can You Borrow with a Reverse Mortgage?
There are many factors that go into figuring out how much a reverse mortgage can provide for a borrower. One of the most important factors is the interest rate, which will be determined by your age and credit score. The other important factor in determining how much you can borrow with a reverse mortgage is whether or not you’re willing to pay taxes on that money.
As a reverse mortgage borrower, you’re essentially borrowing against your home’s equity. Since your lender will take ownership of your home if you don’t repay them at some point, there are limits on how much you can borrow with a reverse mortgage. It’s also important to keep in mind that not all costs associated with caring for your home or paying for its upkeep will be covered under most reverse mortgages—things like taxes, insurance premiums, gas bills, etc., are typically not covered.
How to Avoid Reverse Mortgage Foreclosure
If you are considering getting a reverse mortgage to help with your retirement, then you may want to know how to avoid foreclosure. A reverse mortgage may seem like an easy way out in the short term, but could turn into disaster if you’re not careful. There are certain things to keep in mind before signing on the dotted line.
First of all, be aware that if you don’t pay back the loan, there is no forgiveness. You will still owe the full amount even if you no longer live in your home or die without heirs. Secondly, make sure that your house has enough equity for your needs since people often underestimate how much they need at retirement age.
When you get a reverse mortgage, your lender will set up an escrow account. Your house payments, taxes, insurance and other costs are funneled into an escrow account each month. They will be paid directly from your reverse mortgage proceeds. If there are not enough funds in your account to pay all these expenses, you will be responsible for paying them yourself or else risk foreclosure.
Fortunately, federal legislation now limits how much money may be placed in escrow each month, so you won’t have to worry about your house going into foreclosure if something unexpected occurs that’s beyond your control like a rise in property taxes or emergency repairs needed to keep your home in good condition.
Conclusion
Reverse mortgages are beneficial for people who want to use their home equity to supplement retirement income. The goal of the reverse mortgage is not to turn your home into an ATM, but rather to provide you with a source of income that can help you maintain your current lifestyle.
To be eligible for this type of loan, you will need to have enough equity in your home that the lender feels confident they will be repaid at some point in time when you sell or otherwise transfer the house. A reverse mortgage may not be right for everyone, but if you find yourself in need of money now and don’t want to move or downsize, this could be an excellent option.