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If you’re a senior looking to help boost your income or pay for necessary life expenses, a reverse mortgage could be the solution you’re looking for. For many, reverse mortgages provide additional stability and peace of mind in our constantly changing world, allowing borrowers to enjoy a more peaceful, fulfilling retirement.
Is a reverse mortgage right for you? How do these financial programs work? What are the interest rates? Are they better suited for some seniors than for others? Because reverse mortgages are not well understood, there’s a great deal of confusion surrounding them, how they work, whom they benefit, and more. This guide will explore your available options, detail how they function, and help you determine if applying for one of the various reverse mortgage types is the right option to secure your financial future.
What Is a Reverse Mortgage?
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The first thing we need to establish is what a reverse mortgage is. In contrast to other types of mortgages, it is not a loan to purchase a home. Really, it is closer to a home equity loan than anything else, but even that is not quite right.
A reverse mortgage is actually exactly what it sounds like. You apply for the loan, and a lender will provide you with a specific amount of money. The exact amount will vary from situation to situation and is based on a number of factors. The most important of those is the value of the home in question, but there are numerous others, and we’ll explore them all later in this guide.
The basics of reverse mortgages are the same across the board, though. You apply for a loan with a lender, who then provides you with funds. You get to remain in your home, and you keep the title to that home, as well. You can live in the home for as long as want, and never need to worry about making payments to the lender.
According to Fannie Mae, “A reverse mortgage is a loan product that allows senior homeowners to convert home equity into cash. Most reverse mortgages are provided by the Federal Housing Administration (FHA), as part of its Home Equity Conversion Mortgage (HECM) Program.”
According to the Consumer Financial Protection Bureau, “A reverse mortgage loan allows homeowners to borrow money using their home as security for the loan, just like a traditional mortgage. Unlike a traditional mortgage, with a reverse mortgage, borrowers don’t make monthly payments.”
The National Reverse Mortgage Lenders Association (NRMLA), explains it as, “A reverse mortgage is a loan available to homeowners, 62 years and older, that allows them to convert part of the equity in their home into cash. The product was conceived as a means to help retirees with limited income use the accumulated wealth in their homes to cover basic monthly living expenses and pay for healthcare.”
So, from those explanations, we can draw a number of conclusions about what a reverse mortgage is. It is:
Available for senior homeowners
Designed to let you stay in your home for as long as you like
Designed to allow you to maintain ownership of your home
Designed to provide cash to offset the costs of daily living (although there are no restrictions on how you use the money
Secured by your home
Based on the actual value of your home, but only a percentage of that value will be loaned
Without the need for monthly loan payments
How Does a Reverse Mortgage Work?
A reverse mortgage is both like and unlike a conventional home loan. In the normal situation, a borrower approaches a lender for a loan in order to purchase a home. The lender does their due diligence, vets the borrower, and either decides to loan the money or not. If they decide to move forward, the loan is secured by the home, meaning that if the borrower were to default, the home would be sold to recoup the lender’s costs.
The borrower makes payments every month to the lender over a specified period of time (called the loan’s term). Once the final payment is made, the borrower owns the home outright and the lender is out of the picture.
With a reverse mortgage, you already own the home outright or have a very low balance that can be paid off with the money from the reverse mortgage. The loan is made based on the home’s value, but the money is yours to use as you need – you can pay down medical bills, pay for groceries, take that dream vacation, or just relax and breathe a sigh of relief that you have a financial cushion.
A reverse mortgage lender will make funds available to you, rather than you paying the lender. Of course, the situation sounds a lot like selling your home to a bank. That is pretty accurate, although it is not the whole story.
In this situation, the lender doesn’t actually want to own your home. They want the interest they will earn from the loan. This is how the situation usually looks:
If you meet the requirements, your lender will approve it for a specific percentage of your home’s value.
You close on your loan (paying the required closing costs) and receive the funds from the reverse mortgage in one of a number of different formats to fit your situation and needs.
You live in the home as normal, making no payments to the lender.
When you pass away, move out permanently, or decide to sell the home, the loan (and all interest applicable) becomes due.
What Are The Different Types of Reverse Mortgages?
There are several types of reverse mortgages on the market today. The most common type of reverse mortgage is the HECM, or home equity conversion mortgage, which is insured by the Federal Housing Administration (FHA). HECMs come in fixed and adjustable rate options, and are capped at the current FHA reverse lending limit of $679,650. In addition, HECMs require that the loan first be used to pay off the balance of a borrower’s existing mortgage (if they have one.) While HECM loans have certain limitations, they also come with borrower protections, such as allowing an eligible non-borrowing spouse to stay in their home after the borrower has passed away or moved to a nursing home.
Proprietary reverse mortgages are another type of reverse mortgage loan. These loans are not insured by the FHA, and instead require borrowers to pay private mortgage insurance (PMI). Jumbo reverse mortgages, which offer up to $3 million of funding for qualified homeowners, are one form of proprietary reverse mortgage.
The least common form of reverse mortgage is what’s called a single-purpose reverse mortgage. These reverse mortgage loans are offered by state and local government agencies, as well as certain non-profits, are permit a borrower to use the loan proceeds for one, specific purpose, such as making necessary home repairs or paying off property taxes.