Owners of homes at least 62 years old with a sizable amount of equity can apply for a reverse mortgage. Seniors can access funds to pay for cost-of-living costs in their later years, frequently after they have exhausted all of their other savings or income sources, by borrowing against their equity. Homeowners can obtain the money they require through a reverse mortgage at rates starting at less than 3.5% annually.
How Do Reverse Mortgages Work?
Consider a reverse mortgage loan as a regular mortgage with the roles reversed. In a typical mortgage, the buyer borrows money to pay for the home and repays the lender over time. In a reverse mortgage loan, the borrower borrows money against their existing home, potentially never having to pay back the lender.
The majority of reverse mortgage loans are ultimately not paid back by the borrower. Instead, the property is sold by the borrower’s heirs to settle the loan after they move or pass away. Any surplus funds from the sale belong to the borrower (or their estate). Government-backed programs provide most reverse mortgages with stringent guidelines and criteria for lending.
There are also private reverse mortgages, often known as proprietary reverse mortgages, provided by private non-bank lenders; however, these are less regulated and more likely to be frauds.
The Function of a Reverse Mortgage
Utilizing a reverse mortgage is a reasonably straightforward process:
- It begins with a borrower who is the owner of a home already.
- Either the borrower owns a sizable amount of equity in their home (often at least 50% of the home’s worth) or they have fully paid it off.
- To choose a lender and a program, the borrower works with a reverse mortgage counselor after deciding they need the liquidity that comes with taking equity out of their house.
- The borrower submits a loan application after selecting a specific lending program.
- The lender examines the borrower’s property, title, and appraised worth, in addition to running a credit check.
- If the loan is granted, the lender funds it. Depending on the borrower’s preference, the loan proceeds may be distributed as a lump sum, a line of credit, or a series of periodic installments (monthly, quarterly, or annually, for instance). After a lender provides a reverse mortgage, borrowers must spend the funds on their loan terms.
- While some loans impose limitations on how the money can be used (for example, only for upgrades or renovations), others don’t.
These loans are made for the duration of the borrower’s life or until they move, at which point the borrower (or their heirs) may choose to pay it back, sell the property, or both. Any money left over after repaying the loan belongs to the borrower.
Would a Reverse Mortgage Benefit You?
A reverse mortgage may have a similar name to a home equity loan or line of credit. A reverse mortgage can offer a lump sum or a line of credit that you can use as needed, depending on how much of your property you’ve paid off and your home’s market worth. This is similar to one of these loans.
However, you don’t need a steady income or strong credit, and you won’t have to make any loan payments. At the same time, you live in the house as your primary residence, unlike a home equity loan.
In the circumstances like these, elders can only access home equity through a reverse mortgage without having to sell their residence:
Don’t want to be responsible for making monthly loan payments; cannot afford to make monthly loan payments; are ineligible for a home equity loan or refinance; and
What Conditions Apply to a Reverse Mortgage?
You might be qualified for a reverse mortgage if you own a house, condo, townhouse, or mobile home that was built on or after June 15, 1976. Due to the fact that they actually own shares of a corporation rather than the actual real estate they reside on, owners of cooperative housing are not eligible for reverse mortgages under FHA regulations.
Amounts, Equity, and Age
Reverse mortgages do not have income or credit score criteria, but there are still guidelines for eligibility. You must have at least 62 years of age and sufficient equity (at least 50%) in your house, if not free and clear ownership.
An origination charge, an upfront mortgage insurance premium, additional customary closing costs, regular mortgage insurance premiums (MIPs), loan service fees (sometimes), and interest are all fees that borrowers must pay. The federal government regulates the amount lenders can charge for several things.
All prospective reverse mortgage loan borrowers are required by the U.S. Department of Housing and Urban Development (HUD) to complete a counseling session that HUD has approved. It will go over the advantages and disadvantages of getting a reverse mortgage loan. The counselor should also go over the many ways you can get the money.
The reverse mortgage regulations require you to maintain current homeowner’s insurance, property taxes, and (if applicable) homeowners association dues in addition to maintaining the home’s condition.
You will also be required to return the loan, typically done by selling the house, if you stop residing in the home for some time longer than a year, even if it’s because you need to live in a long-term care facility for medical reasons.