Reverse mortgages are one way senior homeowners who are 62 years and older may be able to tap the home equity. A reverse mortgage gives the homeowner money they need without having to leave the house and without having to repay the loan until the owner dies, the home is sold, or the house is no longer used as the primary residence. As such, a reverse mortgage could be a good alternative to selling your home, home equity loan, and HELOC.
Reverse mortgage loans let you borrow money against your home equity. No payment is required as long as you live in your home. When the last living borrower dies, sells the home, or permanently moves away, the loan must be repaid in full along with all interest and other charges. The remaining equity in your home, if any, belongs to you or your heirs. However, you or your heirs will never owe more than the home’s value.
Regular Mortgages versus Reverse Mortgages
With a regular mortgage, you build up your home equity with each payment you make to the lender. With a reverse mortgage, your home equity decreases each time the lender gives you money.
In a reverse mortgage, the homeowner makes no payments and all interest is added to the lien on the property. As such, the amount you owe grows larger and your equity ownership grows smaller over time. However, it’s important to note that as a reverse mortgage borrower, you continue to own your home. So you are still responsible for the property taxes, insurance, and maintenance of the property. Your loan could become due and payable in full if you fail to carry out these responsibilities.
Borrowers must be at least 62 years of age for most reverse mortgages and must occupy the home as a principal residence. Some programs require that you own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan.
All reverse mortgage programs accept single family home. Some programs also accept 2-4 family home as long as the owner occupies one of the units, along with some condominiums, cooperatives, planned unit developments, and manufactured homes. Mobile homes are generally not eligible.
Unlike traditional second mortgage, or a home equity line of credit, a reverse mortgage is available regardless of your current income, your debt-to-income ratio, and credit score. The amount you can borrow depends only on your age, the current interest rate, and the appraised value of your home.
When you take out a reverse mortgage loan, you have three options of getting your money:
Some lenders will also let you choose any combination of these payment plans. The amount of cash you can get from a reverse mortgage generally depends on your age, your home’s value, location, and the cost of the loan. Older borrowers with more equity in the home generally qualify for a larger loan.
There two main types of reverse mortgage lenders — private sector and public sector:
The total cost of your reverse mortgage depends on your lender. In general, a reverse mortgage will cost you less with public sector lender than a private sector lender. Commercial reverse mortgages are usually very expensive and include a variety of costs — i.e., higher interest rate, application fee, appraisal fee, credit report fee, origination fee, insurance, monthly servicing fee, and other closing costs. These costs usually can be paid as part of the loan, which mean your loan balance will increase more than what you get in cash.
In addition to the obvious, there are hidden costs that you must consider:
One way to better understand the costs is to use a reverse mortgage calculator, for instance you can use calculators below to understand the relationship between your home value, reverse mortgage debt, and the loss of equity.
The article wouldn’t be complete without covering the major pros and cons of reverse mortgages.
Just like any other financial products, a reverse mortgage could help you achieve your goals and give you the financial freedom needed — or it could be bad for your finances. The only way you can make better decision is to learn as much as possible about various financial products, their pluses and minuses, and chose the ones that best fit your needs.
The subject of reverse mortgages is rather complicated, especially when you are dealing with different lenders who offer different options and have different requirements. This article only covered the basics and you should seek out additional information. Here are some resources that you can start with:
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