What Is a Reverse Mortgage? Explained
You may have heard an advertisement before on the radio, watched a commercial on television, or even saw something online or in a newspaper about getting a reverse mortgage. Even if you are well aware of what a mortgage is, it might have left you wondering what the reverse part means. Get a clear idea of what this kind of a loan is, how it works, and all the little details that can help in determining if it’s right for you and your future.
What is a Reverse Mortgage?
The straightforward definition of a reverse mortgage is money that a homeowner borrows against the equity in their home. You can receive a certain amount of cash, depending on what you qualify for. That can be monthly payments, a line of credit, or a lump sum are given to the borrower by the lender. The difference is you already have to own your own home. The loan proceeds can help pay for living expenses or travel. There are different programs – some require you to repay the loan while others take possession of your home when you pass away.
Most often it is people of retirement age, 62 years or older, that will take out reverse mortgage loans because they already own their home outright by that time, or most of it is paid off. The age of the youngest person on the title to the home must also be at least 62. They want to take advantage of the equity they have built up in their property, but they may not want to sell the home but live in the home instead. It’s also a common way to supplement income after leaving the workforce.
How Does a Reverse Mortgage Work?
Unlike a traditional loan, when you are approved for a reverse mortgage, the lender will then send monthly payments to you instead of you making monthly mortgage payments the loan. There is no installment due back to the lender until the home is either sold or the owner passes away. You are still responsible for paying the insurance and taxes on the property, but other than that, there is no bill.
Interest continues to build over the length of the loan, and that gets added on all along the way. The entire amount of the mortgage, including interest, is owed when the home is no longer in your possession because you either sold it or passed away.
Do I qualify for a Reverse Mortgage?
Before even considering a reverse mortgage, you should know whether or not you have all the essential constituents to qualify. The requirements aren’t stringent, but they do have a set of standards that must be followed so that they can match the guidelines set forth by the government and the Department of Housing. The lender also has to protect themselves through these basic rules.
- You must be age 62 or older before applying for a reverse mortgage loan.
- You must own your home, and it has to be your primary residence.
- The home has to be in good condition.
- Manufactured homes, single family homes, multi-family homes of four or less, and some approved condominiums are the only residences that lenders will consider accepting for assets.
- Either you already own your home entirely outright, or you don’t have much left to pay
on it, and the majority of the equity is yours.
You can expect to get some financial counseling before your loan is approved so that it can be concluded it’s the best option for you. You will also be informed of what your alternative options are.
How Much Can I Borrow?
You cannot borrow more money than what your home is worth. However, if for some reason the house gets sold for less than what it’s valued at and more than the initial loan given, you’re not responsible for that shortage. For example, say your home is valued at $200,000, so that’s what you borrow from the bank. When the home is sold, it goes for $175,000. You wouldn’t owe the bank that additional $25,000.
On the other hand, if your home was worth $200,000 and sold for $250,000, the bank only gets the original $200,000 that was borrowed. That remainder of $50,000 will go back to you or in the estate. Figuring out how much you qualify to receive will depend on a plethora of factors including your age, how much your property is valued at, and the interest rate that you are offered.
A 75-year-old homeowner will likely get more money than a 62-year-old. The older you are, the more money you get. If your home is worth more, you will be approved for more, and a lower interest equals more money as well.
The numbers are something that a professional lender can quickly calculate and let you know the exact dollar amount that they can give you when you go in and see them.
Reverse Mortgage Benefits and Fees
The primary benefit of a reverse mortgage is that it doesn’t have to be paid back until you pass away. The last living homeowner has to pay it back if there is more than one person on the loan. You will get the money you need while you’re alive and using the house until you die. Then after you’re gone, the bank sells your house and clears out the debt.
If the property is sold for more than it’s worth, then the beneficiaries to your estate get the extra cash. If it goes for less, then the bank has to soak up its loss.
In general, three different fees get attached to reverse mortgages that are relatively similar to traditional loans. To start with, you’ll have to pay an origination fee of anywhere between $2,500 and $6,000. They calculate what your exact amount is by the first $200,000 value on the home at 2%. Anything that falls above that is then subjected to it at 1%. If your house is worth $200,000, you pay $4,000 in origination fees.
You will also be charged fees for items like a title, inspection and appraisal of the home. These need to be done so the lender can determine the value of your home. This is done so they know how much of a loan they can offer you. These fees are referred to as third-party fees.
FHA charges a one-time 2% fee for your upfront mortgage insurance premium (MIP) on all reverse mortgage loans. As long as your loan is still out, you’ll continue to be charged that same MIP. However, it will be at the rate of 0.5% annually of the balance of the loan. Keep in mind that your loan amount is going to increase over time with interest that’s accrued. Additionally, the MIP owed will also go up. The MIP is often wrapped into the mortgage balance so you won’t have to worry about paying that amount out of your pocket.
Is a Reverse Mortgage Right for Me?
When trying to decide if a reverse mortgage is right for you, there are several questions to ask yourself.
- Are you 62 or older?
- Do you need to supplement your retirement income?
- Do you plan on staying in the same home for a long continuation of time?
- Have you tried for a home equity line of credit and been turned down?
- Is the money from a reverse mortgage part of your financial plan for the future?
After asking yourself those questions you then have to start looking at the bigger picture before making a final decision. For instance, is there going to be someone left in the house when you pass away? The person left with the house will have to pay the loan to stay or move out and let the bank take the home.
Remember as well that whatever property you take your loan out on has to be your primary residence. If you plan on moving to a warmer climate for the majority of the year, it’s not going to work. An expert in reverse mortgages will carefully go over all of these details with you once you apply for the loan.
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