Reverse Mortgage Guide
You’re probably familiar with what a traditional mortgage is. With the typical variety, you borrow money to purchase a home and you pay down your debt over a predetermined number of years.
Reverse mortgages, on the other hand, are the exact opposite. Instead of borrowing money to purchase a home, you borrow against a portion of the equity you have in your home. This allows you to cash out lump sums or receive monthly income to live on.
This can be a great way for homeowners to access large sums of money to pay for other large expenses, like home improvement, medical expenses, retirement expenses, and more.
How They Work
Since reverse mortgages are only available to a (relatively) small group of people, many homeowners don’t know what they are or how they work.
Before getting into how these work, keep in mind that we’ll be focusing on Home Equity Conversion Mortgages (HECMs), which are the most common type available. HECMs are federally-insured and only available through FHA-approved lenders.
With that in mind, let’s take a look at how these work.
As mentioned earlier, they allow you to withdraw a portion of your home’s equity. But you might not be able to borrow the full value of your home.
The amount that you can borrow varies depending on a few factors, including:
- The interest rate when you apply for one
- The age of the youngest borrower
- The lesser of the appraised value of your home or the HECM FHA loan limit ($726,525)
Funds are disbursed by lump sum, monthly payments, as a line of credit, or a combination of fixed payments plus a line of credit.
They don’t have to be repaid until you no longer live in your home. Additionally, while they increase in value over time due to interest and fees, you will never owe more than your home is worth.
With HECMs, you will never be forced to move out of your home, even if you use all of your equity, as long as you can afford costs like property taxes, upkeep, and utilities.
These protections make HECMs safer for homeowners.
Keep in mind, though, there are still risks. Namely, since you have to repay your loan once you move, you will have less money to purchase a new home. If you use one that isn’t a HECM, you also risk losing your home or going into extreme debt.
Who is Eligible for a Reverse Mortgage?
The main requirement to be eligible for a reverse mortgage is that applicants must be age 62 or older.
Additionally, your property must be your primary residence and it has to be either fully or nearly paid off. You have to be able to provide proof of your ability to pay expenses like insurance, HOA fees, property taxes, and utilities.
According to HUD, you also must not be delinquent on any federal debt and you have to participate in a consumer information session given by a HUD-approved HECM counselor.
If you meet these requirements, you will likely be eligible to take one out.
How Much Does a Reverse Mortgage Cost?
Like most other loans, these products do have closing costs.
According to HUD, these costs include:
- Mortgage Insurance Premium: An initial MIP of 2%, plus an annual MIP of 0.5% of the outstanding balance.
- Third Party Charges: This may include appraisal fees, title search and insurance, surveys, inspections, recording fees, taxes, credit checks, and other fees.
- Origination Fee: This fee is the greater of $2,500 or 2% of the first $200,000 of your home's value, plus 1% of the amount over $200,000. HECM origination fees are capped at $6,000.
- Servicing Fee: Lenders can charge a monthly service fee of no more than $30 if the loan has a fixed or annually adjusting interest rate, or no more than $35 if the interest rate changes on a monthly basis.
These fees don’t have to be paid upfront, though. These costs can be financed and paid for by your obligation.
Pros & Cons
They seem great, right?
You can borrow a large sum of money against your home’s equity to pay for major expenses, and you don’t even have to pay it off until you move.
But, as is the case with most things, there are pros and cons when dealing with them.
- HECMs are federally-insured
- You don’t have to make monthly payments
- Funds can be used for a variety of expenses, like living costs, healthcare, home improvement, and more
- You will never end up owing more than your home is worth
- The fees and closing costs can be quite expensive
- Borrowing against your home’s equity will reduce your overall wealth
- You still have to pay for insurance, property taxes, and other expenses
- If you opt for a different types, you risk going into debt or losing your home
All things considered, they aren’t without risks. However, if you need money to cover major expenses and you have a lot of equity in your home, this can be a great option.
How to Get One
Since HECMs are only available through FHA-approved lenders, searching for the right lender is an easier process when compared to shopping for a traditional mortgage.
Be that as it may, there are still some things you should understand about getting oone.
Decide how you want torReceive your funds
When you are approved, you’ll be able to choose how you receive your funds. Your options include:
- Tenure: Equal payments as long as one borrower continues to live in the primary residence
- Term: Equal monthly payments for a fixed amount of time
- Line of Credit: Payments at times of your choosing until the line of credit is met
- Modified Tenure: Line of credit plus scheduled payments as long as you live in the home
- Modified Term: Line of credit plus fixed monthly payments
Keep in mind, this only applies to loans with variable interest. For fixed interest loans, you will receive your money as a lump sum payment.
Find an approved lender
Many lenders offer them, but they might not have the same protections as HECMs.
To get a HECM, you’ll have to borrow through a FHA-approved lender. Fortunately, finding a FHA-approved lender is easy — just perform a quick search to find suitable lenders near you.
The lender you choose will then review your credit and income statements and request an appraisal. This information will help them decide if you qualify and how much you can borrow.
In total, the closing process will typically take about a month.
One of the requirements you have to fulfill is attending HECM counseling.
You can find a counselor on the HUD website. Your counselor will help you understand how HECMs work and what the pros and cons are.
Based on a $200K loan with a 4% interest rate and a 30 year term