What is a Reverse Mortgage?
You, like many hardworking people, save up for years to purchase a home to raise your family in. Buying a house where your kids can always come back and bring their children to for the holidays and gatherings. But you can find yourself in a predicament when they’re grown, and you want to expand the property.
Reverse mortgages are an incredible type of loan solution that helps when you’ve invested your hard-earned cash into your home’s equity. Unlike traditional loans, these mortgages allow you to borrow money from the home you already own. It’s a home loan in reverse.
Are you a homeowner approaching or over 62 and looking for a way to borrow cash for living expenses or home improvements? You can accomplish this without selling your current home. And a reverse mortgage loan may be the answer you’ve been looking for.
How a Reverse Mortgage Works
There are a few different types of reverse mortgages, each depending on your financial situation and what you are looking to use the loan for. The most common form of a reverse mortgage is the Home Equity Conversion Mortgage (HECM). This is a federally insured program that allows homeowners who are 62 or older to borrow cash against their home’s value.
You are eligible if you own at least 50% in your home’s equity under $765,600 to borrow cash against the home's value. However, proprietary reverse mortgages are available through private lenders for more expensive homes so you can purchase larger home improvements.
The reverse mortgage does not require monthly payments and you can repay it with profit you earn if you decide to sell. The loan does incur interest, but the interest is rolled into the loan. Interest only accrues on the amount borrowed against the home, not on the house's value.
Ways to Recieve Proceeds from a Reverse Mortgage
When choosing to reverse mortgage your home, there are several different options to receive the funds.
With a lump-sum payment, you receive all the proceeds from the reverse mortgage at one time, up-front. This is the only option that comes with a fixed interest rate.
- Monthly Payments
Home lenders can give monthly payments in several forms. Borrowers will receive a set amount in monthly payments for as long as they live in the home with a tenure payment plan.
Term payment plans are available too. These monthly payments are made steadily for a set term of the borrowers choosing, such as 10 years, and all have adjusted interest rates.
- Line of Credit
When using a line of credit from a reverse mortgage, the homeowner may borrow money against the home as needed, when needed. The lender will only charge you interest on the amount you borrow when you accept the funds.
Choosing a combination option allows the borrower to receive monthly payments on a term or tenure plan.
This gives you the freedom to tap into a line of credit if they need more at any time. Adjusted interest does accrue on the monthly payments, but you only receive it on the line of credit as and if it is used.
Reverse Mortgage Requirements
You must meet several different requirement types to qualify for a reverse mortgage. In general, borrowers must be 62 or older, live in the home as their primary residence, own the home outright, or own substantial equity of at least 50%. Sadly, You and your partner won’t be able to qualify if you have cooperative housing.
Apart from these requirements, there are some financial requirements for obtaining a reverse mortgage. Borrowers must pay an origination fee and an up-front mortgage insurance premium. They must also maintain property taxes and homeowners insurance while benefitting from the reverse mortgage.
Fortunately for many borrowers, there are no income or credit score requirements for obtaining a reverse mortgage. Many home equity loans prevent you from borrowing against your home for these reasons, but reverse mortgages open up your loan.
Finally, home loan specialists ask homeowners to maintain the condition of their homes. If your lender deems that a borrower is not keeping the house in good enough condition, they can put the home into foreclosure to recoup their loss. Otherwise, you would lower the home’s value below fair market when it’s time to sell, jeopardizing them.
Reverse Mortgage Counseling
Before being approved for a reverse mortgage, borrowers must attend a meeting with a Department of Housing and Urban Development counselor. The government agency explains a reverse mortgage, lays out the pros and cons, and clarifies the homeowner's requirements in this meeting. This counseling session includes a financial assessment to determine whether or not you qualify for a reverse mortgage in many cases.
It is also crucial for you while considering a reverse mortgage because it allows you the opportunity to ask questions from a trusted source. Such as what happens to the home in the event of your passing and gives information on how family members can keep the house in the family if they wish to.
Another critical note in this meeting is a warning for reverse mortgage scams.
Reverse Mortgage Scams
Unfortunately, it is common for people to try to take advantage of you with reverse mortgage scams. They will convince you to enter a shady one without explaining the process or what legal contracts you are agreeing to.
For instance, dishonest contractors may push for a reverse mortgage to get paid for completing housework. These people can produce lousy work and take off while pocketing your money. Then you and your partner or spouse have to deal with the fallout.
There have even been some circumstances where dishonest family members talk seniors into reverse mortgages where they put their home equity into a trust that only benefits them. Greedy recipients may have an agenda with you to gain certain cash assets they could not otherwise access.
To avoid these scams, it is important to attend the HUD counseling session and ask many questions to ensure that you know what you agree to before signing on any dotted lines.
Working with a Reverse Mortgage Lender
Taking out a reverse mortgage an is an excellent option for homeowners who tie their primary source of wealth to their home’s equity. You can fund living expenses or special projects while still getting to enjoy the home you’ve worked so hard to build.
We believe it is crucial to partner with an experienced home specialist rather than risk a scam with your life’s earnings. They understand a reverse mortgage's ins and outs and who is patient to carefully explain all of your options. You can avoid a scam, miscommunication, or misunderstanding by partnering with a trusted lender that cares about you and your partner’s retirement future.
If you need assistance understanding anything about reverse mortgages, give us a call today at (480).800.8387. We cannot wait to help answer your questions and begin your later years with the cash flow you need.