Finding additional money while you’re retired might be difficult, whether you’re having difficulties paying your expenses or need to make some significant upgrades.
However, you might find a solution nearby – in fact, all around you.
A reverse mortgage can swiftly convert any equity you have in your present house into cash.
Still, you should know how a reverse mortgage works so you can make an informed decision about whether this loan is good for you.
So, what exactly is a reverse mortgage?
A reverse mortgage might be a great method to get extra cash to spend whatever you want. You will not be required to sell your home or make additional monthly payments.
The majority of reverse mortgages are federally insured Home Equity Conversion Mortgages (HECMs), which have no restrictions on how you use your money.
You can use the funds to pay for living expenses, medical bills, house improvements, or vacations.
In fact, if you already have a mortgage, the money from a reverse mortgage can be used to pay it off.
Reverse mortgages, on the other hand, aren’t free, and they’ll burn through your home’s value, leaving you or your heirs with less money when it’s time to sell.
What is the process of getting a reverse mortgage?
In a traditional mortgage, you borrow money to buy a home and make monthly payments to the lender to repay the loan. A reverse mortgage compensates you for the value of your home.
In essence, you keep your home’s title and receive a cash advance on your equity in exchange for the lender taking an interest in it.
Reverse mortgage payments are not taxable and have no impact on your Social Security or Medicare benefits.
In most circumstances, you won’t have to repay the loan until you vacate the property, sell it, or die.
This frequently leads to a decision to sell your home in order to pay off the debt you’ve accumulated, however your spouse or children may prefer to secure a new mortgage and keep the house.
The non-recourse clause in most reverse mortgages specifies that you cannot owe more than the appraised value of your house when the loan is due. That means you won’t have to worry about your heirs owing you money when you die.
Who can take out a reverse mortgage?
To qualify for a reverse mortgage, you must be 62 years old and own your house outright or have paid down a large portion of your mortgage (usually 50%).
You must live at that location as your principal residence, be current on any federal debts, and have enough money coming in to cover the costs of property maintenance, such as property taxes, HOA fees, house insurance, and repairs.
A single-family home or a property with no more than four apartments is required. The HECM program allows you to take out a reverse mortgage on your condominium if it is approved by the Department of Housing and Urban Development.
A reverse mortgage, like a typical mortgage, requires you to meet certain financial requirements. You must prove that you will pay your property taxes and home insurance premiums on time by verifying your income, assets, monthly living costs, and credit history.
What are the many forms of reverse mortgages?
Reverse mortgages come in a variety of forms, some of which are backed by the federal government and others which are not.
Mortgage Conversion to Home Equity
The Home Equity Conversion Mortgage (HECM), the most prevalent type of reverse mortgage, is a government-backed loan that may only be obtained through an FHA-approved lender.
To be eligible for this sort of reverse mortgage, you must attend a consumer information session led by a Department of Housing and Urban Development-approved HECM counselor. They’ll go over everything a HECM comprises and help you decide if this is the correct financing solution for you.
Because these loans are so strictly regulated, you’ll have to jump through a lot of hoops. An HECM, on the other hand, gives you more options for repaying your loan.
A tenure payment plan offers small monthly payments for as long as you live in the house; a term payment plan offers larger monthly payments over a set period; a line of credit allows you to take what you need when you need it; or a modified plan combines a tenure or term payment plan with a line of credit.
Reverse Mortgage with a Single Purpose
Single-Purpose Reverse Mortgages are government-regulated mortgages that are only used for one thing. The lender must authorize the loan’s purpose and ensure that it is only utilized for that reason.
Single-Purpose Reverse Mortgages are the least expensive to get due to their lack of flexibility. They’re also easier to qualify for, making equity more accessible to low- to moderate-income households.
Single-Purpose Reverse Mortgages, unlike HECMs, are only paid out in one lump sum. These loans aren’t available in every state, so make sure you reside somewhere that does.
Reverse Mortgage (Private)
Proprietary Reverse Mortgages, unlike HECM and Single-Purpose Reverse Mortgages, are not supported by the federal government. Private lending organizations offer them, and the eligibility conditions are generally less stringent.
You have a lot of latitude with how you spend the loan money because it’s not government insured. This freedom may come at a cost, as these forms of reverse mortgages come with less safeguards for borrowers.
In the hands of the lender, there is more power. They decide on loan eligibility, conditions, and amounts. While a Proprietary Reverse Mortgage may allow you to obtain a larger loan, it may come at the expense of higher interest rates.
Because these sorts of reverse mortgages are more risky, you should conduct sufficient study to see whether they are good for you before committing.
What is the maximum amount of money I can get from a reverse mortgage?
The amount you receive from a reverse mortgage is determined by a variety of factors.
The basic rule is that the older you are and the higher the value of your home, the more money you can get. The age is determined by the home’s youngest borrower or non-borrowing spouse.
The quantity of money you receive is also affected by the type of loan you take out. The HECM amount is regulated by the property’s appraised value and capped by the FHA mortgage maximum of $970,800.
Reverse (Single-Purpose) Because you are just using your home equity for a specified purpose, mortgage amounts are usually smaller.
Because it is up to the lender, proprietary reverse mortgages might give you the greatest money. This form of loan can even allow homeowners to borrow more of their equity or include homes that are larger than the FHA’s maximum size. However, these reverse mortgages usually have higher interest rates.
What can a reverse mortgage be used for?
You can utilize the money as you choose depending on the type of reverse mortgage you qualify for.
The money from HECMs and proprietary reverse mortgages can be used in a variety of ways.
Single-Purpose Reverse Mortgages, as the name implies, require you to use the funds for a single purpose that has been approved by your lender.
Many people utilize their reverse mortgages to cover living expenses, house improvements, or recreational activities like vacation. They can also be used to pay off your current mortgage, eliminating the need for monthly payments.
Is there a fee or expense associated with a reverse mortgage?
A HECM, like a conventional FHA loan, requires you to pay mortgage insurance payments (both upfront and annually) to ensure you get the money you need.
The upfront charge is 2% of the value of your house, but it’s usually rolled into the loan amount. The annual charge is 0.5 percent of the entire balance of your loan.
Then anticipate additional fees from your lender, including origination fees, service fees, and closing costs. Lender fees are limited to $6,000 with a HECM.
The lender is compensated for processing your mortgage with origination costs. The cost will be $2,500 or 2% of the first $200,000 of your home’s value, plus 1% on anything over that, whichever is higher.
The lender is compensated for providing account statements, disbursing loan earnings, and ensuring that your loan conditions are met, such as paying taxes and insurance premiums, through monthly service fees. If your interest rate is modified monthly, the cost cannot exceed $35; if it is adjusted annually or fixed, the price cannot exceed $30.
Closing expenses vary based on the lender and reverse mortgage type you select. They cover costs such as appraisals, title searches, and insurance, as well as surveys, inspections, recording fees, mortgage taxes, and credit checks.
If you get a HECM, you’ll probably have to pay for everything, but Single-Purpose Reverse Mortgages can save you money on some of these expenses.
There are less fees associated with proprietary mortgages. Most don’t charge mortgage insurance premiums, but there’s a catch.
HECMs and Single-Purpose Reverse Mortgages typically have lower interest rates than Proprietary Mortgages, which are managed by private lenders at whatever rates they desire.
You can finance part of these expenses, but this will reduce the size of the loan you have available. Always think about your funding choices.
Reverse mortgage alternatives
A reverse mortgage isn’t the only way to get cash out of your home’s equity. If you’re under the age of 62 or anticipate you’ll leave the house someday, you should think about other options.
You can swap your current mortgage with a larger one and pocket the difference with a cash-out refinance. You’ll almost always be required to preserve some equity in your property, possibly 20%. You’ll make monthly payments on the new loan, including interest, just like any other mortgage.
A home equity loan is a second mortgage on your property that allows you to take out a lump sum loan against a portion of your present equity (usually 75 percent to 90 percent). You’ll have two monthly payments now, and a home equity loan usually has a higher interest rate than a first mortgage.
A home equity line of credit (HELOC) is comparable to a credit card but works differently. Instead of a flat sum, you get a pool of cash that you can draw from whenever you choose, and you only pay interest on the money you take out but don’t replace.
Your lender determines the “draw duration,” which normally varies from five to 25 years, after which you must repay any outstanding funds.