A reverse mortgage is a home loan for homeowners 62 years of age and older, who have considerable equity in their homes. Unlike a traditional forward mortgage, a reverse mortgage doesn’t require the homeowner to make any loan payments. However, the loan balance is payable when the borrower moves away permanently, sells the home, or passes away.
Defining a Reverse Mortgage
Just like any mortgage, a reverse mortgage is a home loan secured by the collateral of the property, which borrowers are obliged to pay back.
Reverse mortgages, however, allow borrowers to convert part of the equity in their home into cash without selling their home. Furthermore, borrowers do not have to repay the home loan until they move away permanently, sell their home, or pass away.
How Reverse Mortgages Work
Before you apply for a reverse mortgage, it is important to know how a reverse mortgage works.
- Reverse mortgages take part of the equity of the home and convert it into cash that is dispersed to the borrower.
- The money the borrower receives with a reverse mortgage is typically tax-free, and it generally does not affect their Social Security or Medicare benefits.
- Generally, borrowers pay back the home loan when the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence.
- In certain situations, a non-borrowing spouse may be able to remain in the home.
- Borrowers keep the title to their home.
- When a reverse mortgage home loan ends, the lender is repaid from the proceeds of a home sale or by a third party who retains possession of the home. If the home is sold, excess profits are distributed to the beneficiaries.
Who Can Get a Reverse Mortgage?
Reverse mortgages are not available to all homeowners. A few conditions need to be met to apply for a reverse mortgage. Namely:
- The homeowner should be at least 62 years of age. With married couples, only one spouse needs to be 62 years of age or older.
- Borrowers must own the home outright or have a low mortgage balance.
- The home must be the primary residence of the borrowers.
- The borrowers must not be delinquent on any federal debt.
- The home must be in good shape and meet the required property standards.
- The borrowers must agree to set aside a portion of the reverse mortgage funds at the loan closing, or otherwise have personal funds, to pay ongoing property expenses such as taxes, insurance, maintenance, repair costs, etc.
- Borrowers must receive counseling from a HUD-approved reverse mortgage counseling agency to discuss their eligibility, the financial implications of the loan, and other alternatives.
Types of Reverse Mortgages Available
There are three different types of reverse mortgages:
- Single-purpose reverse mortgage.
- Home equity conversion mortgages (HECM).
- Proprietary reverse mortgage.
The most common reverse mortgage is a home equity conversion mortgage (HECM). With this type of reverse mortgage, borrowers have six options for receiving the loan value.
- Lump Sum: Receive the entire value of the loan upfront in one payment.
- Annuity: Receive equal payments monthly for as long as one of the borrowers still lives in the home.
- Line of Credit: Borrowers receive money from the loan as needed. Credit is available up to a set amount. Upon completion of the loan, only the total amount borrowed is owed for repayment.
- Annuity and Line of Credit: Receive monthly payments of a set amount, with the option of borrowing more up to a set amount.
- Term Payments: Receive equal payments for a preset
- Term Payments and Line of Credit: Receive equal monthly payments for a set term, with the option of borrowing more as needed.
Getting a reverse mortgage has some advantages for those who are eligible.
- Long-term retirement income: When other sources of income are gone, a reverse mortgage gives borrowers options to remain independent throughout their retirement with consistent income.
- Borrowers get to keep their home: With a reverse mortgage, borrowers are permitted to live in their home as long as it remains their primary residence.
- Access to equity: A reverse mortgage allows borrowers to access the equity tied up in their homes.
Common Questions about Reverse Mortgages
Reverse mortgages are increasingly popular with seniors who have equity in their homes. Here are some common questions about reverse mortgages:
- Are reverse mortgages insured by the government? The only reverse mortgage insured by the U.S. Government is the Home Equity Conversion Mortgage (HECM).
- What fees are involved in reverse mortgages? Reverse mortgages have similar fees to a typical mortgage, including lender fees. These fees are generally paid with equity from the borrower’s home.
- Do all mortgage lenders offer reverse mortgages? Only qualified mortgage lenders offer reverse mortgages. These are specialty loan products that are not available from every lending institution.
- What are the interest rates? Interest rates for reverse mortgages are similar to those offered at any given time for a typical mortgage. For some reverse mortgages, a variable interest rate is used to accommodate the longer period over which the money is borrowed. However, for borrowers who take a lump-sum payment, interest is offered at a fixed rate.
- How much can be borrowed? You are not able to borrow 100% of your home’s value. Many factors go into how much you can borrow, including the appraised value of your home, mortgage rates and fees, the type of reverse mortgage, and the FHA’s maximum claim amount in a given year.
Learn more about Reverse Mortgages.
Marimark Mortgage is based in Tampa, Florida, and serves the mortgage needs of homebuyers, homeowners, and investors in Florida, Virginia, and Pennsylvania.
We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.