Considering a reverse mortgage? Looking for a way to pay household expenses as you enter retirement and beyond? Then this guide on reverse mortgages is for you. We’ll go over everything you need to know, including:
So, What is a Reverse Mortgage?
It’s a loan product offered to older (senior) homeowners. This type of loan was first created in 1961. It was first introduced to consumers by Nelson Haynes of Deering Savings & Loan. It was insured by the Federal Housing Administration in 1983. The goal of a reverse mortgage is simple: It allows homeowners, over 62 years of age, to convert the equity from their home into cash.
How Does a Reverse Mortgage Work?
A reverse mortgage gives older homeowners, over 62 years of age, cash from equity in their home. It’s the exact opposite of how a traditional mortgage works. With a traditional mortgage, you make monthly loan payments to the lender. With this option, the lender pays you. Keep in mind: you’re still on the hook to pay property taxes, homeowner’s insurance, home repairs, etc.
Types of Reverse Mortgages
Home Equity Conversion Mortgage (HECM)
A home equity conversion mortgage is insured by the Federal Housing Administration (FHA). Lenders must be approved by the FHA. With this type, eligible homeowners can convert equity into cash. The amount you can borrow depends on the appraisal of your home, plus the age of the borrower. Interest accrues on the outstanding loan balance. During this time, you won’t make any payments. When the home sells or the borrower(s) die, the loan balance must be repaid in full.
Proprietary Reverse Mortgage
A home equity conversion mortgage is backed by the federal government (FHA). A proprietary reverse mortgage is not. These types of mortgages are structured and insured by private lenders. Also, you can get a larger loan amount.
Single Use Reverse Mortgage
This type of loan is for older homeowners with limited income. It’s purpose is to help pay for things such as property taxes, homeowners insurance, repairs, etc. The loan is given in one lump sum payment. And it doesn’t have to be repaid unless you sell the home or the borrower(s) die.
- You must own your home outright
- Must have equity in the home
- Must not have any federal debts
- The home must be your primary residence
- You’ll need cash flow to pay monthly/annual homeowner expenses (insurance, HOA fees, taxes, etc)
How Can a Reverse Mortgage Help Me?
- Consolidate debt
- Ongoing living expenses
- Home improvements
- Helping children and grandchildren with college
The Pros and Cons
- Access to cash
- Eliminates a monthly mortgage payment
- Homeowners can save more money
- Fees and interest can be very high
- A reverse mortgage can be confusing, especially for seniors
- You’ll still have out-of-pocket homeowner expenses
- May cause issues for your heirs
- Beware of scams
- Medical bills / health issues
- You can’t move
- You’re giving away your net worth
- You may end up paying more fees and interest than your home is worth
- You could lose your home
Reverse Mortgage Alternatives
- Sell your home and downsize (buy or rent)
- Home equity loans
- Home equity lines of credit
- Refinance w/ a traditional mortgage