Reverse Mortgages 101
There are so many mortgage products on the market, it’s hard to keep all of the options straight. Reverse mortgages are one of the options that are a bit of a mystery to most people. This guide will provide an enlightening overview as to what reverse mortgages are, the options you can choose from and requirements for qualifying.
What is a Reverse Mortgage?
Once you reach a certain age, financial planning takes on a whole new meaning. Suddenly, you’re signing up for Medicare and thinking of ways you can cut back to get by on a reduced retirement income. One of those options is a reverse mortgage.
Reverse mortgages are available to homeowners who are 62 or older. A reverse mortgage allows the homeowner to access a portion of their equity while still living in their home. The money you receive from a reverse mortgage won’t have to be repaid until you sell your home or pass away.
Funds from a reverse mortgage can be used to pay off your remaining mortgage, medical bills, and other expenses. You can also use the money as a nest egg for retirement.
It should be noted that there is a downside to reverse mortgages. Taking out the equity in your home will reduce your assets. For many people, having the cash on hand with fewer expenses outweighs the asset reduction.
Requirements for Securing a Reverse Mortgage
Like all mortgages, a reverse mortgage has specific requirements that must be met before receiving approval. There are four key requirements:
As noted above, reverse mortgages are only offered to homeowners that are 62 or older.
In order to qualify for a reverse mortgage, you must own your home outright or have a low balance on the traditional mortgage. A portion of the equity must be used to pay off the remaining balance. Your home must also be in good condition to qualify.
There are many ways to maximize the profitability of rental properties but, unfortunately, a reverse mortgage isn’t one of them. Reverse mortgages can only be used on a primary residence.
Property Taxes and Insurance
Homeowners will still be required to pay their annual property taxes and monthly home insurance premiums.
Beyond the requirements above you’ll also have to meet with a certified counselor if you get a home equity conversion mortgage (see below), which is a reverse mortgage that’s FHA insured. There are also a few limitations to be aware of before signing on the dotted line. Lenders will set maximums for the amount of equity that can be tapped so keep that in mind when you’re projecting income and expenses.
If you live with someone else – a spouse, sibling or partner – it’s best to enter the reverse mortgage as co-borrowers. That way one of you can continue living in the home even if the other moves out or passes away.
There’s also one other caveat homeowners may want to consider. The equity from a reverse mortgage can also be used to buy another primary residence. If you want to downsize to a less expensive, more manageable home a reverse mortgage can be one way of doing that. Using a reverse mortgage this way will help you maintain the real estate assets you’ve built over the years.
Reverse Mortgage Options
No loan product is cookie cutter given all the variables involved. Reverse mortgages are no exception. They come in all shapes and sizes, but there are three types of reverse mortgages to familiarize yourself with:
Single-purpose reverse mortgages. This is the most cost effective reverse mortgage. However, availability is limited in some areas. Single-purpose reverse mortgages are offered by government agencies and non-profits for a specific reason. The lender is the one who gets to decide what the equity funds can be used for, such as paying for home repairs or tax liens.
Proprietary reverse mortgages. A proprietary reverse mortgage is a private loan that’s backed by the lender that services the loan. This option is used primarily by homeowners that have a large amount of equity to tap into. Homeowners with a high-valued home and little to no mortgage often quality for significantly more by using a proprietary reverse mortgage.
Home Equity Conversion Mortgages (HECMs). These are FHA-backed reverse mortgages with fees that are typically higher than a single-purpose reverse mortgage. There is no specific income requirement and you’ll get to choose from a number of repayment options. Another plus is having the ability to live in a place other than your home for up to 12 consecutive months before the loan would need to be repaid. However, the lender can require you to sit funds aside for things like property taxes as a part of the agreement.