What is a reverse mortgage? In the simplest form, a reverse mortgage is a credit line available to homeowners 62+ to convert part of their home equity into cash. In other words, instead of the borrower paying the money back to the lender on a monthly basis, the reverse mortgage servicer pays the money back to the borrower.
It was initially created to help seniors with fixed incomes pay for health care and monthly living expenses. However, it can vary for each situation as there are different stipulations and regulations in different contexts.
How Does a Reverse Mortgage Work?
To get approved to receive funds, one must first work with a reverse mortgage lender, to determine the amount each person can borrow or the “principal limit.” This varies depending on the age of the younger spouse. The lender will evaluate your financial situation, check your credit score, and ensure that your property qualifies. After you are approved the lender will finalize how much you are eligible for. You also have the right of rescission to cancel your mortgage without penalty if you notify your lender within three business days after the mortgage was closed in writing.
Usually, the older you and your spouse are, the more money you will be eligible for, the lower the interest rates, and the more money that your property is worth. It’s also required that any existing mortgage must be paid off using the reverse mortgage, the property you are mortgaging is your primary residence, and of course, keep your home and property in good working condition.
You still keep the title to your house, and the money you receive is usually non-taxable and won’t affect your Social Security or Medicare benefits. The loan must be paid off in the event that the last surviving borrower dies, sells the home, or the property is no longer the primary residence. You are only obligated to pay the balance of the reverse mortgage. All remaining equity is kept by the homeowner or heirs once the home is sold.
Types of Reverse Mortgages
The three types of reverse mortgages are single-purpose reverse mortgages (that are offered by state and local government agencies and nonprofits), proprietary reverse mortgages (private loans), and federally-insured reverse mortgages (HECMS).
Home Equity Conversion Mortgage (HECM)
Most reverse mortgages are done under the HECM program. HECMs are federally insured and backed by the U.S. Department of Housing and Urban Development (HUD), and they can be used for anything. Mortgage insurance out of the home’s equity is paid by the homeowner to participate in the program.
Proprietary Reverse Mortgage
These are private loans for higher value homes and there is no mortgage insurance premium. If you can qualify for one of these, it’s common that you would receive more funds than a HECM. They are also non-recourse loans the same as HECMs. Meaning the homeowner is obligated to pay back what is borrowed, plus any interest only up to the value of the property when the loan is due.
A HECM also gives you a few options on how you can receive the funds. The first option is a fixed rate single disbursement option where you receive one payment. The second is a term option that distributes monthly payments at a specific time, and also a tenure option that distributes cash monthly for as long as you live in your home.
Of the last two options, a line of credit that allows you to tap into those funds whenever you need in the amounts that you choose until the credit is exhausted. The final option includes guaranteed lifetime tenure payments or a combination of monthly payments and a line of credit. A Certified Reverse Mortgage Professional® can work with you to determine which withdrawal option best fits your needs.
Is a Reverse Mortgage Right for You?
Reverse mortgages can be tricky, and the current state of the economy has caused extremes in the housing market. With a volatile market, it’s proactive to be looking for ways to increase your wealth and understandable that many people are concerned about their financial security.
Hire a Certified Reverse Mortgage Professional
Reno-certified CRMP® Chris Handy of Geneva Financial is equipped to help you with all of your reverse mortgage needs. Handy’s experience, expertise, and network will help you find the best reverse mortgage lender in Reno for your scenario at the lowest cost he can structure, regardless of market conditions. Feel free to contact Chris Handy for questions or more information.