Reverse Mortgage: Many longtime homeowners have grown to love their homes and want to remain living there. Unfortunately, senior and retired homeowners may need to access the value in their homes to meet their financial needs.
For many people, a house is their biggest asset. To access the funds, you can sell it. However, thanks to financial tools like reverse mortgages, you don’t necessarily have to sell your home to access its equity for other needs.
Reverse mortgages help retirees tap the value out of their homes without having to move. The best reverse mortgage lenders can help homeowners tap into home equity, say, for a down payment to purchase a new home.
It dose have some drawbacks, but they are not necessarily “last resort” options. They can be a healthy financial choice. Before you take out a reverse mortgage, review your financial situation and determine if it’s right for you. On this article you get to understand better what Reverse Mortgage entails.
How Reverse Mortgage Works
With a reverse mortgage, instead of the homeowner making payments to the lender, the lender makes payments to the homeowner. The homeowner gets to choose how to receive these payments and only pays interest on the proceeds received.
The interest is rolled into the loan balance so the homeowner doesn’t pay anything up front. The homeowner also keeps the title to the home. Over the loan’s life, the homeowner’s debt increases and home equity decreases.
Reverse mortgage proceeds are not taxable. While they might feel like income to the homeowner, the IRS considers the money to be a loan advance.
Reverse Mortgage Application
When you apply for a reverse mortgage, you typically fill out an initial form online or contact the lender directly to express interest. They walk you through your options. After that, you usually meet with an independent counselor who explains the reverse mortgage process and helps you make the right choice for you.
This step is in place to ensure that companies are not taking advantage of elderly homeowners. After that, you will need to get your home appraised to determine its value before you can finalize the details of your loan. When you take out a reverse mortgage, there are also some additional fees to consider.
You’ll have to pay higher closing costs based on your home’s value including expenses like origination fees, appraisal fees, and mortgage insurance. You’ll also be responsible for paying for property taxes, insurance, and repairs on your home.
Types Of Reverse Mortgage
They are majorly three types, which include;
Single-Purpose Reverse Mortgage
A single-purpose reverse mortgage is offered by state, local and nonprofit agencies, and is considered the least expensive process. The state or local government or nonprofit agency specifies the reason for the reverse mortgage.
Area Agencies on Aging can help you find a low-cost single-purpose loan that can help pay for home repairs or property taxes; these types of reverse mortgages are not as prevalent as the rest.
Homeowners can use single-purpose reverse mortgage proceeds only to pay for a specific lender-approved item, such as necessary repairs to the home or property taxes.
Home Equity Conversion Mortgage
They are federally insured reverse mortgages backed by the U.S. Department of Housing and Urban Development. An HECM is likely to be more expensive than a traditional home loan with high upfront costs.
It is the most widely used reverse mortgage because it carries no income limitations or medical requirements, and the loan can be used for any reason.
Counseling is required before applying for an HECM to become fully educated on the costs, payment options and responsibilities involved in the loan.
Proprietary Reverse Mortgage
A proprietary reverse mortgage is used for a larger advance for a home appraised at a high value. For example, if your property is worth more than $679,650, the 2018 lending limit for federally backed HECMs, you may be eligible for a higher loan if you go the proprietary route.
Those with low mortgages qualify for more funds. Counseling is sometimes required before applying for these loans; a counselor can help compare the costs and benefits of a proprietary loan and an HECM to determine if a proprietary loan is right for you.
Because proprietary reverse mortgages are not federally insured, they do not have up-front or monthly mortgage insurance premiums. That means you’re likely to be able to borrow more.
When you take out a reverse mortgage, you can choose to receive the proceeds in one of six ways:
- Lump sum; Get all the proceeds at once when your loan closes. This is the only option that comes with a fixed interest rate. The other five have adjustable interest rates.
- Equal monthly payments (annuity); For as long as at least one borrower lives in the home as a principal residence, the lender will make steady payments to the borrower.
- Term payments; The lender gives the borrower equal monthly payments for a set period of the borrower’s choosing, such as 10 years.
- Line of credit; Money is available for the homeowner to borrow as needed. The homeowner only pays interest on the amounts actually borrowed from the credit line.
- Equal monthly payments plus a line of credit; The lender provides steady monthly payments for as long as at least one borrower occupies the home as a principal residence. If the borrower needs more money at any point, they can access the line of credit.
- Term payments plus a line of credit; The lender gives the borrower equal monthly payments for a set period of the borrower’s choosing, such as 10 years. If the borrower needs more money during or after that term, they can access the line of credit.
Comparing the Best Reverse Mortgage Lenders
Below are well selected lenders and how it compares with others.
If you’re not sure if your reverse mortgage lender is qualified to provide mortgages or if you think that the mortgage being offered to you might be a scam, check with the Nationwide Multistate Licensing System and Registry.
This is the only licensing agent for mortgage companies in all states and territories. It provides consumers with information to protect them and provide professional standards for mortgage professionals.