A reverse mortgage allows homeowners over 62 to receive payments from the lender and repayment is made when the home is sold or the homeowner passes away.
Different from the typical mortgage, a reverse mortgage loan lets you use your home as a way to increase your monthly cash flow. Few people are familiar with this type of mortgage, but the concept is simple and easy to understand.
When you enter into a reverse mortgage, you borrow against the value of your home, turning equity into cash. Over the life of the loan, your homeowner's debt increases as the home equity decreases. Once you move or die, the sale of the house pays off the reverse mortgage.
What is a Reverse Mortgage?
Like a regular mortgage loan, a reverse mortgage allows you to borrow money by using your home as collateral. Unlike a standard home loan in which you pay the lender a monthly mortgage payment, this type of loan pays you a monthly sum for the equity you already hold in your home. It’s a way that older people who are short on cash can tap into the equity in their residences to pay their bills. Only senior homeowners can use this product as there is an age limit for who can get a reverse mortgage.
If you are 62 or older and own your home, you can qualify. By using your home's equity as income, the lender provides you with monthly payments. The income is not subject to taxation, and you don't report it to the IRS.
How Does a Reverse Mortgage Work?
The concept is simple, and it's exactly the opposite of the usual mortgage. As a homeowner, you will not make payments while you still live on the property. The entire reverse mortgage amount will be repaid when the borrower dies, sells their home or moves away.
Your home's value provides the equity for the loan, so you can never owe more than this value. Keep an eye on this factor because the lender will stop making payments that exceed the value of your home.
You can choose to be paid the entire value in cash rather than regular monthly payments. This benefit is specific to the contract you have with the lender and is decided while you negotiate terms.
Reverse Mortage Requirements
Not everyone can get a reverse mortgage, but you can qualify if you meet several conditions. You have to be 62 or older and be the primary resident of your home. Other factors decide your eligibility for this financial product, such as:
- The current condition of your home
- Federal debt
- Completion of a U.S. Department of Housing and Urban Development (HUD) counseling session
- Ability to pay property taxes and homeowners insurance
Your property can qualify if it's a manufactured home as long as the Federal Housing Administration (FHA) approves it. Condominiums need approval from HUD to be eligible for a reverse mortgage.
Types of Reverse Mortgages
Three types of reverse mortgages are available — Single-Purpose, Proprietary and Home Equity Conversion Mortgage (HECM). Take a look at each of them and notice their differences.
Single-Purpose
Local administrations offer single-purpose reverse mortgages for an intended reason. Home improvements and repairs are often funded from this loan, and you can use it for property taxes.
To qualify, the usual requirements apply. As long as you are over 62 years old and your home's equity can cover the loan amount, you are eligible for this product. In some cases, the lender will forward the funds directly to the vendor you wish to pay.
Compared to HECM and Proprietary reverse mortgages, the single-purpose type is cheaper. If you need a one-time payment for a specific reason, this type can help you cover an expense.
Home Equity Conversion Mortgage (HECM)
Home Equity Conversion Mortgages are the most common type of reverse mortgage. This type of reverse mortgage can help seniors who depend on a fixed income. The loan will be repaid once the borrower dies or sells their home.
The Federal Housing Administration set specific requirements. You can qualify for a HECM reverse mortgage if:
- Over age 62
- No federal debt
- Own your residence
- Ability to afford home upkeep and property costs
Compared to the Single-Purpose type, HECM ones are more expensive and have higher fees. Additionally, you can lose your home if you fail to pay insurance and taxes.
Proprietary
In contrast to HECM and Single-Purpose mortgages, proprietary reverse mortgages, also known as jumbo reverse mortgages, are not backed by the government but handled by private lenders. If you did not qualify for the HECM, you can still get accepted for a Proprietary type.
Private lenders work on different terms, but the requirements are still the same. If your home has a high value, the government might impose a limit on the amount you can borrow. Private companies don't have this limit and can fund the loan based on the equity in your home.
The flexibility of repayment is a strong advantage of this type. You can choose between specific amounts of payment as well as regular monthly ones. Be advised that the cost of a Proprietary reverse mortgage is usually higher than the other types.
Pros and Cons of Reverse Mortgages
It is important to consider the benefits and drawbacks of this financial product. You can make a decision after you learn them and decide whether a reverse mortgage is the right choice for you.
Pros
You can cover an existing mortgage: If you have an ongoing mortgage for your home, you can use this loan to handle your monthly payments. This way, you enjoy a less financially stressful life and get the most out of your income without worrying about debt.
Not subject to taxation: Because the funds are tax-free, you get to use the real value of your home. Because it is not taxable income, you don't have to report this money to the IRS. Retirees will benefit the most since they have to maximize their net income.
Flexible payments: Depending on the type of reverse mortgage, you won't have to make monthly payments. In most cases, you pay the loan when you sell the property or when you move out or die. A reverse mortgage will never exceed the value of your home.
Cons
You need financial stability: If you are considering getting a reverse mortgage, most likely you're in need of some funds. Because there are extra fees on this loan, you have to make sure you're able to afford them. Keep in mind that you have to pay property taxes and insurance.
Your heirs may lose the home: To pay the value of the loan, you or your heirs may have to sell the property. This decision is yours to make, but it will come into effect immediately after you die. If your home has a significant history and meaning in your family, you might want your children to inherit it.
Not available for vacation homes: An important condition for getting a reverse mortgage is to live in the property you want to use for the loan. You can only use your current home; other properties you own are not eligible.
Should You Get a Reverse Mortgage?
A reverse mortgage could be a wise choice if you want to turn your home's equity into cash. If you are over 62 years old and you have a stable income, this choice may be a good idea.
Some people attach sentimental value to their homes that is not justified by a cash amount. If you feel connected to your property, it might not be a good idea to get a reverse mortgage on it.
Some mortgage companies offer loans without proof of income, which can be ideal for someone who wants to get a mortgage loan with just a bank statement.
You need to live in your home to qualify for this financial product, and it wouldn’t be the right product for you if planning on moving out anytime soon.
If you want to maximize your home’s potential, then a reverse mortgage is a choice that will bring you lots of benefits. Many seniors find out that the value of their homes has increased over the years. A reverse mortgage allows you to turn the value of your home into cash without having to give up the property.
How Much Does a Reverse Mortgage Cost?
The cost of a reverse mortgage is usually more expensive than other types of loans. Usually, the exact cost depends on several factors. Because you don't have to pay the amount you owe, interest and fees are your only ongoing costs.
You face upfront costs at the beginning of the contract. They consist of origination fees, a mortgage premium and other real estate costs. For these one-time fees, you have the choice to pay either with cash or with the loan itself.
Your lender charges fees for managing this loan, which include the cost of your mortgage insurance.
You will pay at least $120 for the HUD counseling session to qualify for a reverse mortgage. Contact your lender, which will provide you with all the necessary information about costs.
How to Avoid Reverse Mortgage-Related Scams
Reverse mortgage scams often target older homeowners with tactics like unsolicited offers or demands for upfront fees. Be wary of anyone claiming you need to take out a reverse mortgage or asking for money before providing any services. Legitimate reverse mortgage counselors approved by the U.S. Department of Housing and Urban Development (HUD) cannot recommend specific lenders or accept payments from homeowners.
To avoid falling victim, never respond to unsolicited reverse mortgage offers. Work only with a HUD-approved housing counselor who will educate you on the pros and cons for free. Ensure the mortgage company is legitimate by verifying their credentials and avoiding high-pressure tactics. Take your time, consult trusted family members, and walk away from any deal that seems too good to be true.
Best Reverse Mortgage Lenders
As always, Benzinga can take care of some of the hassles for you. Benzing has already found the best reverse mortgage lenders so you don’t have to. Just reach out to any of these great lenders and get started today.
- Best For:Self-employed BorrowersVIEW PROS & CONS:securely through CrossCountry Mortgage's website
Alternatives to a Reverse Mortgage
If a reverse mortgage is not for you, several alternatives might fit your needs.
Home Equity Loan
In this loan, you can borrow directly from your home equity. These loans have a fixed rate that doesn’t change over time. You pay a monthly fee that begins right after the contract starts.
Your home's equity acts as collateral for the loan. A home equity loan can be a great choice for someone who wants to convert built-up equity into cash.
If you run your own business, you can check out the best mortgage lenders for self-employed. These providers are specialized in providing financial products to those who don’t have a fixed income.
Home Equity Line of Credit (HELOC)
Also called HELOCs, these loans can pay for improvements and repairs in your home. You can pay other expenses with this loan, which is similar to the Single-Expense reverse mortgage.
The payments are constant and won't change with time. You avoid surprise expenses and enjoy greater flexibility with this plan.
- Best For:Homeowners With Limited Cash FlowVIEW PROS & CONS:securely through Unlock's website
Personal Loan
If you are in need of funds immediately, a personal loan might help you. You borrow a sum of money that you can repay over time. These loans come with interest, so you end up paying more than the amount of money you received.
Because you are creating debt, there may be better options than personal loans. But if you are in need of funds and you don't qualify for a reverse mortgage, it is an option worth considering.
Frequently Asked Questions
How much money can you get from a reverse mortgage?
The lender determines the exact amount you get in a reverse mortgage. Several factors contribute to this sum, with the most important one being the value of your home. If your property has a high value, your borrowing limit is higher.
How do I find a reverse mortgage lender?
You can search for these providers online. Take a look at each company and read their terms. Get in contact with them and ask about the options mentioned in this article. You can read more about mortgage lenders with no tax returns.
What is the difference between a HECM and a reverse mortgage?
A HECM is a type of reverse mortgage insured by the FHA, available to homeowners aged 62 and older. It offers more flexibility and borrower protections compared to a reverse mortgage from private lenders.