A reverse mortgage is a unique loan product for homeowners over 62 who want to tap into the home equity they’ve worked hard to build up. But is a reverse mortgage the right option for you?
To help you understand the ins and outs of reverse mortgages, let’s go over exactly who qualifies and discuss some pros and cons.
What exactly is a reverse mortgage?
Put simply, a reverse mortgage is a type of home equity loan that doesn’t require any loan payments unless the borrower sells their home, permanently moves away, or dies. It’s restricted to people who are over 62 and have at least 50% equity in their home.
Since reverse mortgages are still loans, they have to be paid off once you stop living in your home or if another maturity event happens. The loan is due in full once it reaches maturation – and it’s usually paid by selling the home it was used for.
You or your estate (typically your children or a spouse) will be in charge of working with your loan servicer to make a payment plan. You can make payments to your reverse mortgage before it reaches maturation.
How can you get a reverse mortgage?
Seniors have three options for obtaining a reverse mortgage:
1. A home equity conversion mortgage (HECM). This is offered by the Federal Housing Administration. The FHA has certain restrictions on loans that may exclude many seniors.
2. A proprietary reverse mortgage (also called a jumbo loan). Offered by private lenders. These typically have fewer restrictions and higher loan amounts. These are great for seniors who don’t qualify for HECMs.
3. A single-purpose reverse mortgage. Offered by nonprofits and local governments. These are smaller loans expressly for renovations or property tax deferments. These are only available in lump sums.
Through an HECM, you can choose to receive payments these ways:
1. One lump sum. You’ll get all of the money upfront. This includes a fixed interest rate.
2. Monthly/term payments. You can choose monthly payments for a set period of time or until you stop living in your home. These options come with a variable interest rate.
3. A line of credit. You’ll have a line of credit available as you need it. This has a variable interest rate, but you’ll only pay interest on what you actually borrow.
You can combine the line of credit option with either of the monthly payment options.
A private lender can offer you options similar to the FHA’s reverse mortgages, but often for higher amounts and different terms that may be more amenable to your lifestyle. They’re often called “jumbo loans” because they’re intended for homes that are worth more than the FHA’s borrowing limit. In 2020, that limit is $765,600.
What are the benefits?
Cashing out some of your home equity gives you access to a lot of capital very quickly. You can use that to pay for sudden bills, taxes, medical expenses, or home repairs.
Basic living expenses
A reverse mortgage shouldn’t be your only source of retirement income, but it’s an excellent supplementary source of income while you enjoy senior living!
Proprietary and HECM options let you use your money as you see fit. That means you can make investments in real estate or other ventures thanks to your home equity.
Reverse mortgages are non-recourse loans. That means whoever is in charge of paying it off once your loan reaches maturation won’t have to worry about paying extra if the loan amount ends up exceeding your original home value.
Continued home ownership
You’ll continue to enjoy full ownership of your home. Your heirs or living spouse will also own the home if you bequeath it to them after you pass away.
Are there any downsides?
Getting a reverse mortgage could affect your eligibility for Medicaid. To qualify for Medicaid, individuals must possess less than $2,000 in liquid assets (or $3,000 for couples) at the end of a month. Reverse mortgage payouts could put you above that limit.
Continued financial obligations
You’re still on the hook for property taxes, repairs, insurance, etc. You’ll have to continue meeting these financial obligations while also meeting your loan terms. You’ll also have to pay loan closing costs and other fees, which may have to come out-of-pocket.
If you can’t meet loan requirements, pay property taxes, or meet other housing financial obligations, you’re still at risk of foreclosure. A reverse mortgage isn’t like waving a magic wand that makes taxes, fees, and insurance payments disappear.
Variable interest rates
If you choose monthly payment or line of credit HECM options, you’ll be subject to variable interest rates. Proprietary and single-purpose options may have different standards; contact your loan servicer for more information.
There are some scam risks out there. When looking at proprietary reverse mortgages (which are offered by private lenders), make sure to read all of the terms of your loan before signing and ask lots of questions. Be wary if something seems amiss or too good to be true.
It may help to have a trusted relative or financial advisor sit down with the numbers to ensure the math works out – and so that you’re not stuck with surprises down the road.
You have to meet certain requirements to be eligible for a reverse mortgage. While different lenders have different requirements, there are two common factors: you must be over 62 and you must fully own your home (or at least a majority of it).
If general, you must:
• Be 62 years or older. If one spouse is younger, they must be left off the loan.
• Borrow only for your primary residence. Secondary properties don’t qualify.
• Own your home outright or have built at least 50% equity in your home.
• Meet certain property requirements. Some lenders require that your home is in a certain condition before approving you for a loan. Check with your lender for specifics.
You can read more about HECM-specific requirements here. Otherwise, ask your loan servicer if they have any special conditions for borrowers.
Still have questions? Contact us
Associates Home Loan is proud to offer proprietary reverse mortgages to Florida seniors looking to live out their retirements comfortably. We’re also happy to offer assistance with applying to other reverse mortgage programs. The team at Associates Home Loan is ready to answer your questions or get your reverse mortgage application started. Just give us a call at (813) 328-3632 or click here to contact us.