As a senior citizen or retiree, your expenses often go up while income goes down. That’s why a reverse mortgage can be helpful, which allows homeowners over 62 to cash out their home equity.
How does a Reverse Mortgage work?
A reverse mortgage is exactly what it sounds like: a mortgage that goes the other way! Instead of the homeowner paying the mortgage lender, the lender pays the homeowner. Note, it only works if you have a significant amount of equity in your home, because the money you get comes out of the value of your home.
You only have to pay off the reverse mortgage if you move, sell your home, or pass away. Reverse mortgages are an option for homeowners above 62 years of age who have significant equity or a small mortgage on their home. One of the conditions for this loan is that you will have to live in the house and maintain it. It’s considered a last resort source of funds, but has become very popular as part of many retirement plans.
With a reverse mortgage, you’re free to use the money you receive for anything you like. You can pay off debt, pay down health costs, or even fund that Hawaii getaway you’ve been dreaming of since your twenties . If you sell your home and there’s a balance left, it will go to either you or your heirs.
Although a reverse mortgage is an easy source of funds, it can be an expensive process. The closing costs, rates, and other potential downsides of a reverse mortgage are sometimes enough to send a homeowner running in the opposite direction. And even if you’re comfortable with the cost, another consideration is that you’ll still be responsible for keeping your home in good condition, paying all the property taxes, and paying insurance. If you were already concerned about these costs, then a reverse mortgage may not be the right option for you.
How Much Can I Get?
The amount of funds you’ll be eligible to receive depends on the following:
- Your age, or the younger spouse if married
- The value of your home
- The lower value; between the value of your home and Federal Housing Administration’s HECM mortgage limit of $679,650.
- Interest rate
If you'd like to find out how much money you are eligible to receive, fill out the form below for a risk-free consultation.
What Kind of Reverse Mortgages are Available?
There are three types of reverse mortgages: home equity conversion mortgages (HECM), proprietary reverse mortgages, and single purpose reverse mortgages.
- Home equity conversion mortgages (HECM): These come from a Federal Housing Administration (FHA) approved program. The FHA insures the reverse mortgages made by lenders. According to the FHA, HECM borrowers do not have to repay the loan until they no longer use the home as their primary residence, or upon the death of all borrowers (when there is no eligible non-borrowing spouse.)
- Proprietary reverse mortgages: These are insured by the lenders that make them.
- Single purpose reverse mortgages: These are used by low and moderate income homeowners. They’re offered by state and local governments and nonprofits. As the name suggests, single purpose reverse mortgages may only be used for a purpose set out by the lender. If a lender requires you to use the reverse mortgage for home repairs, for example, you’re contractually bound to use it for that
Take the time to consult with a reverse mortgage expert to find out which reverse mortgage option works best for you.
Reverse Mortgage Payment Methods
If you find a lender who will provide a reverse mortgage, you’ll get to decide how you want to be paid. While receiving monthly payments is a popular choice, there are some other ways to receive your funds.
TERM OR TENURE PAYMENTS
One of the most well known payment methods associated with reverse mortgages are monthly payments. Both "term" and "tenure" payments offer fixed monthly payments that will remain unchanged regardless of fluctuations in your home value, with only a slight difference between the two.
This type of payment method allows borrowers to receive fixed payments for an agreed upon amount of time. Term payments are a great way to expand on your retirement strategy.
For example, did you know that Social Security benefits increase the longer you delay receiving them? With a reverse mortgage, you might be able to use the funds to hold off a little while longer on receiving Social Security benefits. All you would have to do is consult with your lender on the amount of money you are eligible to receive, and determine how many years you can gain adequate funding from your home equity before accepting your hard-earned benefits!
Tenure payments work just like term payments, with one difference. This option lets you receive fixed payments for as long as you live in your home and it’s your primary residence. Under the tenure plan, even if your loan balance is higher than the current value of your home, your fixed payments will not change or be stopped. In fact, the only time tenure payments stop is if the recipient passes away or leaves the home for good.
BOTH term and tenure payment methods can be modified to include a line of credit to coincide with your monthly payments. Here’s a bit more about that.
LINE OF CREDIT
An increasingly popular method for reverse mortgage payment is through a line of credit. As with HELOCs, opening a line of credit with your reverse mortgage is perfect for homeowners who don't need a steady stream of income, but would like to have a secure reserve of funds to use whenever they need it.
As an added benefit, you can actually increase your line of credit with a reverse mortgage line of credit plan. Because of this, choosing the line of credit plan is often the best way to augment your borrowing potential.
For borrowers who need a large sum of money fast, reverse mortgages have a lump sum option. This payment method lets you receive all of your eligible funding in one large payment.
Of course, you don't have to tap into all of your home equity at once. The lump sum option lets you decide how much of your eligible funding amount you'd like to receive. This makes the lump sum plan perfect for alleviating large debts or paying for costly home renovations. The only downside is that you would have to refinance in order to make use of your remaining equity.
FUNDING A HOME PURCHASE
Interestingly enough, you can use funding from a reverse mortgage to help purchase an entirely new home. Do this by combining reverse mortgage funds from the proceeds from the sale of your old home, your income, private savings, and/or gift money. This option is the perfect plan for homeowners who would like to move in retirement, or who are trying to greatly increase their purchasing potential for a new home.
Regardless of what your plans are, there is a reverse mortgage payment option that will help you achieve your goals. The best thing to do is to consult with a reverse mortgage specialist who can help you define those goals, and select the payment option that works best for you.
Reverse Mortgage Pros:
The borrower isn't required to make monthly payments
You receive a sum of money
You may use the money for anything you like
The money can be used to pay off the existing mortgage
Reverse Mortgage Cons:
Larger than average closing costs
Higher interest rate than average mortgage rate
Diminishes your home equity
You are still responsible for maintaining the house
You are still required to pay property taxes and insurance payments
How Do I Qualify for a Reverse Mortgage?
Here’s what you need in order for you to be eligible for a reverse mortgage:
- You must have full ownership of the home, and be able to provide title/deed, or have a relatively small mortgage on your home
- The home must be your primary residence
- You must be current on any Federal debt ( e.g. income taxes or student loans)
- You must be able to pay property tax and insurance on the home
- Borrower must attend a free HECM counselling and information session