A reverse mortgage is a unique type of home loan that allows investors and property owners who are at least 62 years old to turn significant property equity into cash they can spend. With a reverse mortgage, property owners essentially borrow against the property’s value. They do not have to make traditional monthly mortgage payments and are actually ‘paid’ by the lender.
If you’re considering taking advantage of the distinct benefits of a reverse mortgage, consult a leading American mortgage broker today. Most reverse mortgages are insured through the Federal Housing Administration, (FHA), so if the borrower cannot repay the loan, the FHA reserves will cover it.
The following article will address the importance of reverse mortgages, how they are used, how they can be beneficial, and how they can be detrimental. If you’re unsure or curious about taking out a reverse mortgage, this article can help.
How Do Reverse Mortgages Work and How Are They Used?
Unlike a traditional loan, the reverse mortgage works by happening in ‘reverse.’ Instead of the borrower paying the lender, the lender pays the borrower. Reverse mortgages allow older homeowners with substantial equity to convert that equity into expendable cash.
The Three Types of Reverse Mortgages
There are three types of these mortgages, including proprietary reverse mortgages (i.e., a jumbo reverse mortgage), home equity conversion mortgages (HECMs), and single-purpose reverse mortgages.
The home equity conversion mortgage (HECM) loan is the most common by far and uses a line of credit. It is also the only reverse mortgage loan type with government insurance. Single-purpose reverse mortgages are the least expensive and least common. If you need a jumbo loan in a lump sum, you can contact a private lender.
By avoiding traditional mortgages, reverse mortgage borrowers may enjoy the many benefits of reverse mortgage loans.
What are the Eligibility Requirements for a Reverse Mortgage Loan?
A reverse mortgage has certain critical requirements, mostly relating to a borrower’s age and equity. Because the reverse mortgage loan is intended for older property owners who lack other sources of retirement income, potential borrowers must provide evidence of several conditions.
Borrowers must be at least 62 years old, and any co-borrower must be at least 62 years old as well. This age requirement is important because it’s one indication of the time through which equity was built in a home.
Equity & Property
The borrower of a reverse mortgage loan must typically have at least 50% equity in his or her home. Furthermore, the borrower must reside in the property against which they are taking out the loan. There is also a property type requirement. This primary residence must be either a house, townhome, condo, or manufactured home built on June 15, 1976, or after.
Certain owners do not qualify. For instance, owners who ‘own’ shares of a corporation in cooperative housing do not actually own the real estate. As a result, they do not meet the reverse mortgage requirements under FHA rules.
How are Reverse Mortgage Loan Payments Disbursed?
When borrowing against the value of your home with a reverse mortgage, you have several options for receiving the loan. You can receive the money as a lump sum, in fixed monthly payments, or by a line of credit. You can also couple this line of credit with monthly reverse mortgage payments.
The time it takes to receive the loan can vary widely. Some reverse loans close in only a month while others take up to two months. It’s always a good idea to consult an expert before applying for a loan. Whether you seek Debt Service Coverage Ratio (DSCR) loans, reverse mortgage loans, or traditional mortgages, speak with a specialist first.
How Are Reverse Mortgages Repaid?
The full loan balance is due and payable when the borrower is deceased, moves from the property permanently, or sells the property. The limit to how much a property owner can borrow is called the principal limit. This limit factors in the age of the borrower, the interest on the reverse mortgage loan, and the value of the home.
In some cases, a non-borrowing spouse can pay back the loan. If the non-borrower dies, heirs or other relatives can pay off the loan. Over time, the interest cost on the loan is added to the balance monthly. As the reverse mortgage balance grows, the cost of interest payments grows.
The following options can be exercised to pay back the loan:
Home Sale – The borrower or others can put the home on the real estate market, keeping what’s left from the sale after paying forward the loan proceeds.
Mortgage Refinancing – If you’d like to move but not sell the home, you can convert your reverse mortgage into a conventional loan type through refinancing. Depending on the loan terms, you’ll just have to make monthly payments on the new loan balance.
New Mortgage – Additionally, new mortgages can be used to pay off any balance on the reverse mortgage. Heirs often take out a second mortgage, as it is similar to the borrower using refinancing.
Give Up the Deed – When nothing else is viable, the borrower or heirs can give the lender the deed. At this point, the lender will then foreclose on the home.
Benefits of Reverse Mortgage Loans in 2023
A reverse mortgage makes sense as a home loan because it offers many benefits. These benefits include untaxed income, access to home equity, no monthly mortgage payments, no income or credit qualifications, the ability to reside in your primary residence, and the ability to be repaid through other mortgage payment options.
Reverse mortgages are especially great for senior citizens lacking sources of retirement income. The many reverse mortgage benefits include:
Home Equity Access Without Monthly Payments
One of the main reverse mortgage advantages is access to equity. Rather than make a monthly payment, month after month, borrowers receive payments from their homes’ equity. As the loan balance increases with time, the equity decreases. Given that seniors often lose monthly income when they retire, this can be very useful.
No Income or Credit Requirements
Worried about your line of credit? Fortunately, reverse mortgage loans don’t have requirements for credit scores or income levels. Unlike with home equity loans, you won’t have to meet any standards. That said, if you have delinquent federal debt, such as income taxes, you may become ineligible. You will also need to maintain property taxes, homeowners’ insurance, and even HOA payments.
Helps Pay Off Existing Mortgages And Debts
Borrowers may have accrued other debts or be behind on current mortgage payments. Fortunately, reverse mortgage loans can help reduce or eliminate these debts. You can choose to pay off your existing home loan while also addressing other debts such as car loans and credit card balances.
Your reverse mortgage income, whether received in a lump sum, every month, or by credit line, is not taxable. That’s because the IRS determines this money to be “loan proceeds.” So, if you’re worried about income taxes, don’t be. Nonetheless, always contact a tax expert first.
Stay In Your Primary Residence
Older borrowers probably don’t want the hassle of having to leave their beloved homes and find new places. Fortunately, reverse mortgages allow borrowers to stay in their homes near friends and loved ones. As such, they don’t have to stress over purchasing or renting a new property.
There are many benefits of reverse mortgage loans. Feel free to consult an expert about these reverse mortgage advantages and any disadvantages as well.
The Disadvantages of a Reverse Mortgage in 2023
The reverse mortgage pros and cons vary depending on the homeowner’s situation. From issues with property taxes to foreclosure, income benefit disqualification, upfront fees, and other costs, reverse mortgages do have their disadvantages.
High Fees and Closing Costs
You will face upfront mortgage insurance premiums, origination fees, and other closing costs with reverse mortgages. This can make a reverse mortgage more expensive than a traditional home equity loan.
Inheritance, Equity, and Potential Foreclosure
Because the equity in the home decreases as the reverse mortgage balance increases, any heirs will receive less equity than they might have otherwise. Furthermore, the inability to repay the loan may prevent heirs from owning the property. After all, property taxes and insurance payments are still required.
Make sure you’re paying property taxes and insurance! In some cases, the lender may have no choice but to foreclose on the home.
The U.S. Department of Housing and Urban Development (HUD) requires all potential reverse mortgage borrowers to undergo a counseling session. About 90 minutes long, this session addresses the pros and cons of using a reverse mortgage.
In some cases, borrowers may be disqualified from other income benefits, such as Supplemental Security Income (SSI) or Medicaid.
Be sure to consult an American advisors’ group about the pros and cons of a reverse mortgage.
Knowing If Reverse Mortgages Are Right for You
Whether or not these loans are right for you depends on your goals, financial situation, personal circumstances, and future outlook. Overall, reverse mortgages are great for accessing equity, paying off debts, avoiding income requirements and taxes, and staying put in your current home. However, they can also reduce equity significantly, damage inheritance, and be very pricey.
If you meet all the underlying criteria and want to stay in your home and need help paying off expenses and debts, such as a traditional mortgage, the benefits of reverse mortgage loans may be for you.
On the other hand, if you want or need to move due to health or other circumstances and are already struggling to pay property taxes and homeowners insurance, you may find alternative options more beneficial.
Are you unsure about the right financial decision? Looking for a competitive interest rate? Don’t know if you should elect for a reverse mortgage, home equity credit line, home equity loan, or cash-out refinance option? Consult the premier mortgage brokers at The Mortgage Shop and put your worries behind you. We can guide you through the finer details so you can make an informed decision.
Frequently Asked Questions
These mortgages are home loans that allow older homeowners with substantial equity to borrow against their homes’ values while avoiding monthly payments. The loans are repaid when the borrower dies, moves out of the home, or sells it.
Borrowers have to be at least 62 years old, live in their homes, and have significant equity in their homes, usually over 50%. Other conditions may apply.
Funds are paid out in lump sums, monthly payments, lines of credit, or some combination thereof. Contact a mortgage broker about your particular financial qualifications.
Reverse mortgage closing costs and fees include origination fees, insurance costs, and expenses such as upfront insurance premiums and prepaid items. There may also be monthly servicing fees depending on your interest.
Reverse mortgages can reduce heirs’ inheritance. This happens because as the balance increases, the equity in the home decreases. In some cases, heirs may be unable to repay loans and the home may go into foreclosure.
The full loan repayment is due and payable once the borrower has died, moved from the property permanently, or sold the property. These loans can be repaid through sales proceeds from the home, by refinancing the mortgage, through a new mortgage, or, as a last resort, by giving the deed over to the lender to foreclose on the home.