What Is Reverse Mortgage
If you are at that stage of life where you are enjoying the benefits and freedom that come during retirement, then you will also be planning for financial independence for the remainder of your senior years. Are your retirement funds and pension payments sufficient to meet medical expenses, pay debts, take vacations, make home improvements and entertain with your family and friends? Seniors often decide to tap into the equity in their own homes by selling and moving to lower cost or more serviced facilities. But what if you don’t want to move out of your home? A reverse mortgage may be just the solution you are looking for.
What is a Reverse Mortgage?
A reverse mortgage is a loan made to you by a financial institution (the lender) that is backed by the equity in your home. To be eligible for a reverse mortgage, one of the borrowers, usually you or your spouse, needs to be aged 62 or older and you need to own your home. Unlike conventional loans, you do not make any repayments while your home remains your primary place of residence.
It is called a “reverse” mortgage because over the term of the loan the lender pays you, the borrower. Depending on the conditions of the loan, the money you receive from a reverse mortgage may be paid as a lump sum, a monthly cash advance or a line of credit where you control the amount and timing of payments. Borrowers may also be able to negotiate for a combination of different types of payments. If you still have a conventional mortgage owing on your home, the lender will usually agree to an initial advance payment to pay the outstanding debt. Reverse mortgages must be the first or “primary” debt against your home. You can even use a reverse mortgage to buy a new home with your down payment providing the equity.
There are a range factors which affect the cost of the reverse mortgage loan. These include interest rates, upfront fees, insurance, and closing costs. Under agreement with the lender, you may be able to receive an advance payment to settle the upfront fees.
Reverse mortgages have conditions that state you do not have to make any repayments unless you permanently move out, sell the home or pass away. When any of these events happen to the last surviving borrower on the reverse mortgage, then the loan becomes due. Reverse mortgage lenders may also request repayment if you don’t maintain the home in the condition it was in when the loan was agreed, or don’t pay property taxes, or don’t keep the home insured.
When the reverse mortgage loan becomes due, you or your heirs will be required to repay all of the total of the payments you received and the costs of the loan, plus interest. If at that time, your home is worth more than the amount due, then you, or the heirs to your home, keep the difference.
The amount of money you can borrow with a reverse mortgage depends mostly on your age and the value of your home. You get more money the more your home is worth, and you get more money the older you are. Your home will be appraised to determine its value. Appraisal is conducted by a licensed appraiser who inspects your home and compares it to recent sales of similar homes in your area.
There are two types of reverse mortgages available to borrowers. The first is the Home Equity Conversion Mortgage (HECM). These are by far the most popular type of reverse mortgages and are insured by the US Federal Housing Administration (FHA). The FHA sets important criteria and instructs financial institutions how much they can lend you under a HECM. The second type of reverse mortgages are proprietary loans provided by financial institutions who act independently from the FHA. Proprietary reverse mortgages are rare and are mostly designed for people with very high value homes. They typically have lower fees but higher interest rates than HECMs.
When you have decided that a reverse mortgage is the right choice for you, it is important that you seek independent financial advice to consider your situation and the options available. In the case of HECMs, you will be required to discuss the program with a government approved counseling agency.
A reverse mortgage works by releasing the equity in your home to provide choices and comfort, and help maximize your enjoyment during your senior years.