What is Reverse Mortgages?
A reverse mortgage is a loan you get for the equity you have in your home. A reverse mortgage is also know as a HECM, a home equity conversion mortgage. HECM loans can be acquired from many lender and are insured by the Federal Housing Administration. If you have built up a large equity stake in your home you can use that equity to get a loan that does not have to be repaid until after death. Any existing mortgages on the home need to be repaid with the funds received from a reverse mortgage.
How Does a Reverse Mortgage Work?
A reverse mortgage works by using the equity in your home as collateral for a loan. If you are at least 62, this is a viable option. If you have a large equity stake or your home is paid off, you can receive a large amount of cash to help pay bills, or to enjoy for retirement. The money you receive does not need to be repaid until 6 months after death. The remaining balance on a reverse mortgage is paid off when your estate sells the home.
The good news is that you will never owe more than the appraised value of the home. Worst case scenario is the balance of the loan is the same amount or less than the home’s appraised value. In this case the loan will be considered paid, assuming it sells for the appraised value. If the home is appraised and sells for more than the remaining reverse loan balance the borrowers estate or heirs’ would be entitled to the difference.
As an example: Let’s say your current home’s value is $250,000. You have a mortgage on the home with a remaining balance of $50,000. You qualify for a reverse mortgage loan for $200,000 minus $50,000 to pay off your existing loan, leaving you with $150,000 to use how you wish. Your loan balance is $200,000.
Some of the highlights of a reverse mortgage
- Available to homeowners who are at least 62 years old
- The loan does not need to be repaid until you sell, or after death
- Receive funds from a reverse mortgage in monthly payments or a lump sum
- Funds received can be used to anything
- Can borrow up to 80% of your home’s equity
- Maximum loan amount of $625,500
- Should have at least 50% equity in your home to qualify
Which types of homes qualify for a reverse mortgage
- Single family home and 2-4-unit properties as long as you own at least one unit
- An FHA-approved condo or townhouse
- FHA-approved manufactured home
Reverse Mortgage Pros & Cons
Reverse mortgage pros
- Loan does not need to be repaid until you sell, or 6 months after death
- Reverse mortgage loans are tax-free If the funds are not withdrawn, the amount available will increase every year
- You do not have to own your home to qualify
- Funds received can be used to anything
- Receive funds from a reverse mortgage in monthly payments or a lump sum
- Can borrow up to 80% of your home’s equity
- No credit score requirements
Reverse mortgage cons
- If you move to a nursing home and are out of the home for 12 months the loan could become due immediately
- Higher interest rate than other options
- Mortgage insurance costs
- High closing costs and lender fees
- Could cause you to no longer be eligible for Medicaid
Reverse Mortgage costs and interest rates
Reverse mortgage interest rate
The interest rate for a reverse mortgage will be approximately the same as an FHA loan. FHA loans have rates that are slightly lower than most conventional loans. Having a low mortgage interest rate is one of the benefits of a reverse mortgage.
Mortgage insurance premium
All reverse mortgages will require PMI, or private mortgage insurance. They’re required to protect you in the event the lender declares bankruptcy. There is an upfront PMI payment that will be 0.50% if you take out less than 60% of the amount of the loan. If you take out more than 60% of the loan amount in the first year the upfront fee jumps to 2.5%. You will also pay mortgage insurance every year until it is paid of 1.25%. The upfront and annual PMI fees will be added to your loan amount.
Lender origination fees
You will be charged a fee from the lender, known as a loan origination fee. If the home value is at or below $125,000 the maximum amount the lender can charge is $2,500.
If home value is over $125,000 the lender can charge up to 2% of the loan amount up to $200,000. Any amount over $200,000 can not be charged at a rate of more than 1% of the home value. the maximum origination fee the lender can charge is 1%
Alternative options for Reverse Mortgages
Reverse mortgages aren’t for everyone. A home equity loan or home equity line of credit is another options for those that need cash and have a lot of equity built up or just need a lower monthly payment.
Home equity loans and Home equity lines of credit HELOC
A home equity loan in some ways works very much like a reverse mortgage. You use your home equity to secure a loan. However, unlike reverse mortgages which do not need to be repaid until you sell the home, or death. Home equity loans need to be repaid monthly. A home equity loan is best for someone that can afford to repay the loan but just need extra cash to make home repairs or pay another unexpected expense. HELOC loans are also available to anyone, you do not need to be 62 to qualify, like with a reverse mortgage.
HELOC loans are similar to a traditional home equity loan but instead of getting one upfront lump sum payment you will get a credit line you can borrow from as needed. HELOC’s work very much like a credit card. You can borrow money at any time and pay it off whenever you want. You will only be charged interest on the amount you borrow.
Benefits of Home equity loans and HELOC loans No minimum age requirement No services fees and low closing costs Lower interest rates than reverse mortgages No mortgage insurance is required Cheaper to borrow money than a reverse mortgage