• How does a reverse mortgage work?
  • Is a reverse mortgage a good idea?
  • What will a reverse mortgage cost?

A reverse mortgage borrows against your home’s equity. They’re available to seniors who hold equity in their homes. You’ll get cash out but don’t have to sell your home. Reverse mortgages don’t have to be paid back as long as you continue to live in your home.

The mortgage loan is due when you move out, sell your home or pass away. If you or your heirs want to keep the property after that, you’ll have to pay the loan balance. Otherwise, the reverse mortgage lender will keep the home to settle the debt.

There are three major types of reverse mortgage loans: home equity conversion mortgage, proprietary reverse mortgage and single-purpose reverse mortgage.

  • Home equity conversion mortgage. The home equity conversion mortgage is the most common type of reverse mortgage funding, and it is available to qualified borrowers who are at least 62 years old with homes that are paid off or have low mortgage balances. These loans are insured by the U.S. government through the Federal Housing Administration. If the amount you owe from the reverse mortgage grows to exceed the home value, the FHA will assume most or all of the loss. You will pay a mortgage insurance premium, but it can be financed into the cost of your loan. The FHA limits the origination and servicing fees charged by reverse mortgage lenders. HECMs make sense for most properties valued at less than $1 million, says Peter H. Bell, CEO of the National Reverse Mortgage Lenders Association.
  • Proprietary reverse mortgage. Proprietary reverse mortgages are similar to HECMs, but they do not offer a government guarantee. They have fewer restrictions, and the lender could loosen eligibility requirements, such as eliminating the financial review with a counselor from the Department of Housing and Urban Development. This kind of loan can exceed HECM loan limits, so this can be a good option if you have a high-value property. But fees may be higher than an HECM. The right reverse mortgage option depends on which programs you qualify for. “Proprietary loans are not available in every area,” Bell points out. “On the other hand, some properties do not qualify for an HECM reverse mortgage, like a condominium that doesn’t meet the FHA standards.”
  • HECM for purchase. An HECM for purchase can be used to buy a new home for your primary residence. You enter into a contract to buy your home, pay a down payment, and then finance the balance of the purchase with the reverse mortgage rather than paying cash or using a first-lien mortgage. The new home can’t be a vacation home or an investment property. This strategy lets you complete everything in one transaction, and you will not owe monthly mortgage payments for your new home. Many seniors use an HECM for purchase to downsize or move closer to family members.
  • Single-purpose reverse mortgage. With a single-purpose reverse mortgage, the lender restricts how you can use the money from a reverse mortgage. For example, you may not use the money to pay property taxes or to make home repairs. These reverse mortgages are typically the least expensive option, but they are limited in availability. Some state and local governments and nonprofits offer them, and they are typically for low- and moderate-income borrowers who may not be able to qualify for other types of reverse mortgages.

With a reverse mortgage, you tap home equity without selling your home. These funds can offer extra money during retirement to pay off debt, maintain your lifestyle and handle surprise expenses. And unlike with home equity loans, you won’t have to make monthly payments. A reverse mortgage only needs to be repaid when you sell your house, move out or pass away, and it is typically paid for with the money from the sale of your home.

A reverse mortgage lender doesn’t receive the title or the right to sell your house, so long as you keep up with the housing costs, including property taxes and homeowners insurance. Even if you move out, you still have the option to pay off the loan to keep the property. On top of that, when you receive money from a reverse mortgage, it counts as a loan, not as income. As a result, your Social Security and Medicare will not be affected.

“With a reverse mortgage, people take their home equity and turn it into a flexible source of money,” Bell says. “This gives them more options during retirement. For example, when they need money, they can borrow through their line of credit rather than being forced to sell a stock that’s paying a nice dividend.”

Find the Mortgage That’s Right for You

Reverse mortgage lenders charge a number of fees. While you don’t have to pay the majority of fees until you leave your home, you could receive less money overall than if you had sold the home outright. The reverse mortgage company will also charge interest on what you borrow. It doesn’t have to be paid as long as you’re still living there, but it reduces your home equity.

Your reverse mortgage loan is due if you move out, sell the home or pass away. If you downsize, you’d have to pay off your reverse mortgage – typically by selling the home. And while you don’t have to make loan payments on a reverse mortgage, you still need to cover other housing costs, such as property taxes. If you don’t, the reverse mortgage lender could foreclose on your home. However, Bell notes that this concern is not unique to reverse mortgages: “If you don’t pay your property taxes, you could eventually lose your home in any situation.”

A reverse mortgage could reduce the inheritance for your heirs, as it reduces the equity in your home. If your heirs sell your home after your death, proceeds from the sale of the home will be used to pay off the loan, and they will receive any remaining proceeds. If they want to keep your property, they would need to pay off the loan first. “We often have clients that decide not to proceed with a reverse loan because they’re worried they won’t leave as much of an inheritance,” says Andrina Valdes, executive sales leader and COO at Cornerstone Home Lending. “We also counsel clients to think about discussing with their potential heirs before moving forward.”

When you take out a reverse mortgage, the lender will let you borrow a percentage of your home equity. A reverse mortgage typically lets you borrow up to 60% of your home equity, but the actual amount you take out depends on a few factors, including your age, appraised home value and financial situation. When you qualify for a reverse mortgage, you can choose to receive your money in a number of ways, including as a single disbursement or with tenure or term payments.

Fees will vary depending on the type of reverse mortgage you obtain, but you can expect these fees with an HECM:

  • Appraisal.
  • Closing costs.
  • Origination fees.
  • Initial mortgage insurance premium.
  • Points (optional for a lower interest rate).

  • Loan interest: Reverse mortgages charge fixed or adjustable interest rates. Valdes recommends that you research all the possibilities for loans. “Adjustable-rate mortgages often scare people, but the ARM features in an HECM can create more options and let the borrower use their equity more wisely,” she says. “A well-informed borrower makes better decisions.”
  • Mortgage insurance: You will continue paying mortgage insurance to the FHA for guaranteeing your loan, an annual MIP of 0.5% of the outstanding mortgage balance. This is added to your outstanding loan balance, so you don’t have to pay for the mortgage insurance while you’re still living in your home.
  • Servicing fee: The lender can charge a monthly servicing fee for managing your loan. The maximum monthly servicing fee is $30 for fixed- or adjustable-rate loans that reset annually, and $35 for adjustable-rate loans that reset monthly.

Choose the best reverse mortgage for your needs among competing reverse mortgage companies by considering these factors:

  • Loan types. Shop reverse mortgage companies to find out which loan options they offer. For example, if you want an adjustable-rate line of credit, a lender that is limited to fixed-rate lump sum or tenure payments won’t be a good fit for you.
  • Costs. Compare reverse mortgage offers by getting rate quotes and identifying the reverse mortgage company with the lowest interest rates and fees. Be aware there’s some give and take, so look at the bottom line as you compare reverse mortgage lenders. “Often, the difference between lenders is where they put the costs,” Bell says. “Lenders that charge a lower interest rate are usually charging more upfront, while low-cost lenders may charge a higher interest rate. The right choice depends on when you want to pay: upfront or over the course of the loan.”
  • Customer service ratings and reviews. Consider how a reverse mortgage lender rates in customer satisfaction. Read lender reviews and check with the Better Business Bureau to see whether a lender has any complaints or comments from other borrowers. Bell recommends that you use lenders who are members of the National Reverse Mortgage Lenders Association. “Our lenders have to follow a code of ethics for how they treat their customers. If a customer ever has an issue with a lender on our list, they can reach out to us and we can help resolve the dispute,” he says.

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