Simply put, a reverse mortgage is a loan for homeowners age 62 and older that requires no monthly mortgage payments.
Interest accrues like any other loan but is added to the balance owed instead of requiring a monthly payment.
You may make a payment of any amount at any time to prevent the balance from increasing (or increasing as quickly), but it is not required.
The loan is repaid when the borrower sells the property, permanently leaves the home or passes away.
Available funds can be distributed as a single lump sum, line of credit, structured monthly payments, or combination of any/all.
The most common type of reverse mortgage is the Home Equity Conversion Mortgage, (HECM), a program the Federal Housing Administration adopted as a federally insured program in 1988 after introducing it as a trial program in 1987.
While a traditional or “forward loan” requires scheduled monthly payments, reverse mortgages are not repaid until the loan reaches maturity.
What it is:
- An equity loan designed to meet the needs of homeowners age 62+
- A loan that requires no monthly mortgage repayments
- Repaid when the last surviving borrower sells or otherwise permanently leaves their home
What it is NOT:
- Selling your home to the bank
- Relinquishing title or your ownership rights
- Right for everyone
You own your home
With a reverse mortgage, you continue to own your home.
Like any mortgage, you will receive a monthly statement outlining all interest charges and balance information.
You will continue to pay your property taxes and homeowners insurance.
The only difference will be the absence of a coupon to return your monthly payment. Why? Because no payment is necessary.
However, there is no prepayment penalty on a reverse mortgage. Therefore, you may repay the interest charges, a portion or all of the principal or any portion of the loan at any time you wish.
In this respect, a reverse mortgage really is the best option for borrowers who want to pay something but cannot pay a full mortgage payment or whose payments would not be on a normal monthly time frame due to sporadic income.
Required HUD approved counseling
The Federal Housing Administration wants you to fully understand how the loan works and requires all applicants to receive independent third-party counseling by phone or in person.
Once you have received the counseling you will receive a certificate of completion which is then signed and delivered to your lender of choice.
How much can you get from a reverse mortgage?
The maximum loan amount you may qualify for is based on the youngest homeowner’s or eligible non-borrowing spouse’s age, current interest rates, and your home value.
The amount of money you may borrow is generally 40-60% of your homes’ appraised value. If your home value is $822,375 or less, the federally insured will likely meet your needs. If your home value exceeds the national 2021 lending limit of $822,375 you will generally receive a larger benefit/payout on a jumbo reverse mortgage.
Is a reverse mortgage right for you?
Anyone who has desires or needs that cannot be met with their current income levels may want to research if a reverse mortgage will help in their situation. A reverse mortgage is a great tool to help you stay in the home you love or to simply enhance your retirement years.
Who is it NOT right for?
Because there are some closing costs setting up a reverse mortgage, these loans are not recommended for those who plan to move within a few years — such as people who might require imminent care in a nursing home or inpatient facility.
Can I prepay the loan without penalty?
Yes! You can choose to pay monthly payments to lower the balance or you can pay the entire loan at any time without penalty (as would be the case if you later decide to sell your home). Unless you repay your mortgage voluntarily, your loan is not due until the last surviving spouse no longer lives in the home as their primary residence.
Your heirs have the option to keep the home and pay off the balance owed or 95% of the current value, whichever is less. They can sell the home and keep the proceeds or they can walk away and owe the lender nothing, regardless of the balance owed after the borrowers pass. If they do wish to sell, the lender will work with them to allow for a sale.
Time is not unlimited though, so you should have conversations with them so that they are aware that they will be required to make plans for this eventuality at some point. If your heirs choose not to act, the reverse mortgage lender will have no choice but to foreclose on the home.
Are loan proceeds taxable?
Will reverse mortgages affect Social Security or Medicare?
Reverse mortgages do not affect public benefits such as Social Security and Medicare. However, the proceeds can impact eligibility for those who are receiving “needs-based” state or local assistance. This is not specific to a reverse mortgage as any excess funds can change the qualifications on these types of programs.
What are the qualifications?
FHA introduced “Financial Assessment” to the reverse mortgage program, which requires lenders to check a borrower’s ability to pay their ongoing obligations such as property taxes and homeowners’ insurance.
If within the past 24 months you have had no late payments on property charges or other consumer credit and meet FHA’s residual income, you should have no problem qualifying for a reverse mortgage.
- A reverse mortgage is a loan against your home that requires no monthly mortgage payments
- You will need roughly 50% equity in your home to be eligible
- Any remaining equity belongs to your heirs
- If the home is upside down, there is no recourse to your family
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