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Category : Reverse Mortgage

What is a Reverse Mortgage Loan and How Does it Work?

Chances are that you’ve seen a commercial for reverse mortgage loans before, but few people actually know what they are. It turns out that reverse mortgages are actually a powerful way to access the equity in your home, and supplement your income in your later years of life. Want to learn more about reverse mortgage loans? We’ve put together an in-depth overview of everything you need to know about reverse mortgage loans below:

Overview – What is a Reverse Mortgage Loan?

A reverse mortgage is a form of mortgage that allows you to access the equity in your home through monthly installments, a lump sum payment, or a line of credit that’s accessible at any time. It’s called a reverse mortgage because instead of you paying the bank money every month, the bank pays you every month. The best part about this is that the payments made to you each month are tax-free! Although a reverse mortgage may sound great, there are a few criteria you have to meet before getting one:

  • Your reverse mortgage has to be taken out on your primary residence – it can’t be used on your second home or vacation home.
  • You must be at least 62 years old to take out a reverse mortgage.
  • If you are taking out a home equity conversion mortgage (a special type of reverse mortgage insured by the Department of Housing and Urban Development), you must attend a counseling session.

How Does a Reverse Mortgage Loan Work?

retired couple enjoying time on the swing
While having a lender send you money each month sounds too good to be true, it’s not. With a reverse mortgage, you are essentially taking distributions from your home’s equity each month for the life of the loan. Each month, you will lose a little bit of equity in your home, and receive a monthly installment in return. This money can be used for practically anything you want, depending on the type of reverse mortgage you get. (We’ll cover the different types of reverse mortgages in the next section.)

However, it’s important to remember, that even though the lender is paying you every month, you will still have expenses related to your home that you’re responsible for paying. These expenses include:

  • Property taxes
  • Home maintenance and repairs
  • Homeowners insurance and flood insurance (if applicable)

If you fall behind on any of these items, the lender is able to foreclose on your home, so be sure to stay up to date with your taxes, insurance, and repairs!

What are the Different Types of Reverse Mortgages Loans?

Happy aged couple consulting with agent
There are three main types of reverse mortgage loans. We’ve listed them below:

Proprietary Reverse Mortgage
A proprietary reverse mortgage is a type of privately issued reverse mortgage. You can generally use the funds for anything you want, such as a vacation at the beach, or just some extra spending money. However, it’s important to remember that it does not come along with federal insurance and protections that a HECM reverse mortgage comes with. Proprietary reverse mortgages don’t have a loan cap like HECM reverse mortgages, so they may be your only option if you have a very expensive home.

Home Equity Conversion Mortgage (HECM)
HECM reverse mortgages are the most common form of reverse mortgage. They can be obtained by borrowing from a Federal Housing Administration (FHA) lender. As we’ve mentioned before, HECM loans are insured by the federal government through the Department of Housing and Urban Development. The limit for HECM loans vary by year, so be sure to check the HUD website for the most up-to-date limits.

Single-Purpose Reverse Mortgage
The single-purpose reverse mortgage is the least costly form of reverse mortgage. Proceeds from a single-purpose reverse mortgage can only be used for the intended purpose stated in the application, as the name would suggest. Single-purpose reverse mortgages are typically issued by local governments or charitable organizations to low to moderate income households. Unfortunately, single-purpose reverse mortgages are not offered everywhere, given the nature of the lending party.

Pros and Cons of a Reverse Mortgage Loan

Although reverse mortgages sound perfect, it’s important to remember that there are always benefits and drawbacks with everything in life. In order to help you form a deeper understanding of reverse mortgages, we’ve listed some of their benefits and drawbacks below:

Pros

  • You can use the proceeds from most reverse mortgages for whatever you want.
  • Reverse mortgages can provide a great source of supplementary income to your social security or retirement plan benefits.
  • There are no monthly payments with a reverse mortgage.
  • The HECM reverse mortgage is backed by the federal government through the Department of Housing and Urban Development.

Cons

  • With each distribution, you lose a little equity in your home.
  • As your equity decreases, the loan balance increases, and so does the amount of interest that has accrued on your loan.
  • There is a very real chance that you could outlive your loan term, and be on the hook to pay it back.
  • Since a reverse mortgage decreases your equity over time, your heirs may not stand to benefit from the inheritance of your home.

Frequently Asked Questions

retired grandmother looking at cellphone with granddaughter
We know we just threw a lot of information at you, and you’re bound to have some additional questions. In an effort to provide some additional clarity, we’ve answered some of the most frequently asked questions below:

Can a Reverse Mortgage Be Refinanced?
Yes, a reverse mortgage is very similar to a traditional mortgage in the sense that it can be refinanced. In fact, the process for refinancing a reverse mortgage is practically the same as refinancing a traditional mortgage!

Is a Reverse Mortgage a Good Idea?
A reverse mortgage can be a great idea if you’re looking to supplement your retirement income without having to work a part-time job. However, it’s best that you speak to your financial advisor before taking out a reverse mortgage, or any loan for that matter.

Are Reverse Mortgages a Scam?
Reverse mortgages are certainly not a scam! In fact, some reverse mortgages are insured by the federal government through the Department of Housing and Urban Development.

In Summary – Are Reverse Mortgages Worth it?

Depending on your situation, a reverse mortgage could be a great way to supplement your retirement income without having to go back to work. Reverse mortgages are a powerful way to access the equity in your home that you’ve been building for decades. And quite possibly the best part is that these installments are paid to you tax-free!

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Category : Reverse Mortgage

Reverse Mortgage Lenders: Finding Help with Retirement

When it comes to retirement, financial stability is a must. In today’s world, however, more and more people are finding it difficult to retire due to the economy or a lack of savings. If you are 62 or older and think you might be ready to retire soon, you need to be aware of your options and form a plan. One such option looking into what reverse mortgage lenders can do for you. So, how does a reverse mortgage work? According to Investopedia, a reverse mortgage is a loan designed for homeowners ages 62 and up looking to borrow against their home equity without dealing with the stress of monthly payments. Ultimately, this style of mortgage is ideal for seniors in need of funds for living expenses. Alternatively, reverse mortgage lenders can help to diversify sources of retirement income, hedging against risks like market downturns or outliving one’s savings.

If you think reverse mortgage lenders could potentially help plan your retirement, you likely have a lot of questions. For instance, what are the reverse mortgage lending limits? And where can I find a reverse mortgage loan application to get started? Within this article, we’ll discuss all of this and more, so you gain an understanding of everything you need to know about reverse mortgage lenders before moving ahead with the lending process.

How Does a Reverse Mortgage Differ from a Traditional Mortgage?

When it comes to traditional mortgages, you typically borrow money to help pay for a home at the time of purchase, gradually paying it backover time. Each time you make a payment, you’re actively building your equity while your loan balance decreases. Naturally, reverse mortgages are quite different because while you’re using your home as collateral for the loan, reverse mortgages are repaid once the borrower is no longer in the home.

When you take out a reverse mortgage, you won’t be required to make monthly payments. However, you will need to continue paying property taxes and homeowners insurance. Furthermore, interest and fees are often added to the loan balance each month, so, the loan balance goes up rather than down over time, unlike a traditional mortgage.

Reverse Mortgage Lenders’ Lending Limits 2022

In terms of how much you can borrow, your borrowing limit is also commonly referred to as the “principal limit”. When a bank reviews your reverse mortgage loan application, they will take into account your age, the value of your home, and the interest rate on your loan. More often than not, loans with older borrowers, lower interest rates, and higher-priced homes can expect higher principal limits than those with younger borrowers, higher interest rates, and lower-priced loans. Today, per the government-insured Home Equity Conversion Mortgage (HECM), the maximum reverse mortgage limit you can borrow against is $970,800—despite your home being appraised at a higher value.

What Costs are Involved When You Hire Reverse Mortgage Lenders?

Reverse mortgages can be quite expensive. Especially when you consider that, like with traditional mortgage loans, you aren’t responsible for just the money you borrow, but for the interest and fees involved as well. As mentioned previously, the amount you owe continues to grow as time goes on. Furthermore, there are some upfront costs involved. You can opt to pay these costs out of pocket or use your loan proceeds so you’re not hauling money to the closing. However, using your loan for these upfront fees means you have less money for other expenses.

Reverse mortgage lending upfront costs include:

  • Origination fees to the lender
  • Real estate closing costs to third-party professionals
  • Initial mortgage insurance premium to the FHA

In addition to the aforementioned costs, there are ongoing costs involved when working with reverse mortgage lenders. These include interest, MIP or mortgage insurance premiums, and servicing fees. These fees are charged on a monthly basis and are calculated as a percentage of your remaining loan balance.

How Do You Pay Back a Reverse Mortgage?

First and foremost, a reverse mortgage is not free. It’s a loan that you or your family must pay back eventually.Reverse Mortgage Guides says a reverse mortgage must be paid back in full when the non-borrowing spouse or last surviving borrower either dies, sells the home, or no longer uses the house as a primary residence (i.e., entering assists living or moving in with family). No matter what the situation, there are a few ways to pay back a reverse mortgage, including:

  1. Sell the home
  2. Refinance the mortgage
  3. Take out a new mortgage
  4. Provide a deed in lieu of foreclosure

Reverse Mortgage Requirements

When it comes to reverse mortgage lenders, there are several requirements to which HECM reverse mortgage borrowers must commit. In cases where these requirements are not consistently met, you are likely to lose your home to foreclosure.

  1. Property Taxes and Homeowners Insurance is Paid on Time

When you take out a reverse mortgage, how you pay your property taxes and homeowners insurance can change. Your lender will first do a financial assessment to determine your options for paying these costs, potentially including making direct payments to the insurance company and tax authority, making direct payments with the help of your loan, or allowing your lender to take care of it using loan proceeds in a designated account.

  1. You Home Must be Maintained Properly

Keeping your home well-maintained with a reverse mortgage is imperative. What that means is making the necessary repairs as instructed by your lender. Those that regularly maintain their home can expect little trouble obtaining a reverse mortgage. On the contrary, if your home needs major repairs, you may be required to complete them as a condition of getting the reverse mortgage.

  1. Your Home Must Serve as Your Primary Residence

As a condition of your reverse mortgage, you will be required each calendar year to certify in writing that you used your home as your primary residence. So, if you split your time between your home and an alternative location, you’ll only be able to get a reverse mortgage on the home where you spend most of the year.

Deciding if a Reverse Mortgage is a Good Idea

Now that you have a better understanding of reverse mortgage solutions and how they can benefit your retirement, you can decide whether hiring reverse mortgage lenders is the right decision for you. Because retirement is such an important goal in life, forming a plan makes all the difference in the world. Ultimately, New Retirement says a reverse mortgage can be immensely helpful if:

    1. You don’t plan on moving any time soon
    2. Your spouse is 62 or older
    3. You feel capable of meeting the financial and physical requirements of home ownership
    4. Your home is just an asset

With many helpful reverse mortgage lenders, calculator tools, and reverse mortgage loan applications found conveniently online, you can get a better idea of what to expect in the form of a free quoteright from your laptop. Additionally, there are many reverse mortgage lenders and experts available either online or in your area who are well-equipped to not only provide you with the answers and support you need but also provide a way to begin the reverse mortgage loan application process as well. If you live in the state of California in particular, click here to learn what reverse mortgage lenders can do for you.