What is a Reverse Mortgage?
If you’re nearing retirement, you’ve probably heard the term ‘reverse mortgage’ thrown around quite a bit- but what is a reverse mortgage and how does a reverse mortgage work? Also referred to as a home equity conversion mortgage (HECM), a reverse mortgage is a loan made by a lender to a homeowner that uses the home as security or collateral. Reserved for those who are 62 years or older, reverse mortgages are intended to help retirees with limited income use the accumulated wealth of their home to cover basic month-to-month living costs, including health care expenses and home improvements. Although this was the original intention behind reverse mortgages, there is currently no restriction on how the proceeds of a reverse mortgage are used.
The group of seniors who are most likely to benefit from a reverse mortgage include:
- Those looking to supplement a fixed income retirement.
- Those who need a home equity line of credit (HELOC).
- Seniors who will remain in their home for the long-term.
- Those who are looking to use a reverse mortgage as a financial tool in their retirement plan.
If you fall into any of the above categories or are curious about state-specific information regarding reverse mortgages and the requirements of getting approved, continue reading for more loan information.
How Does a Reverse Mortgage Work?
If you’re considering reverse mortgage solutions but aren’t quite sure how they work, let us quickly explain. When you own a home with a traditional mortgage, you gain equity over time as you pay off the loan. What’s equity? Home equity is the difference between what your home is worth, its appraised value, and any debt you have from mortgages against the home. For example, if you own a home that’s worth $500,000 in today’s market, and owe $50,000 on your mortgage, you have a home equity that’s worth $450,000. If you’re like most Americans, this amount of equity makes up much of your net worth, and as you reach retirement age you may wish to tap into this equity to supplement your fixed income.
Although you can sell your home to tap into this equity, selling your home doesn’t make sense if you don’t want to move. And other options, like taking out an equity loan or obtaining an equity line of credit, can be difficult to obtain. For those who don’t want to put their home on the market or deal with the hassle of obtaining an equity loan or equity line of credit, a reverse mortgage is a great alternative.
Curious about how much money you can get? Read on for more reverse mortgage information.
How Much Can I Get?
According to the National Reverse Mortgage Lender’s Association, there are several factors which determine the amount of funds you’re eligible to receive through a reverse mortgage. Those factors include:
- Age (or the age of the youngest spouse in the case of couples)
- Value of home
- Interest rate
- Lesser of appraised value or the HECM FHA mortgage limit of $636,150.
In general, an individual’s borrowing power increases as they age, if their home is more valuable and as interest rates fall. For example, an 80-year-old will be able to borrow more than a 65-year-old if all other factors are equal. and this individual would be able to borrow more at a 4 percent interest rate than you would at a 6 percent interest rate.
Understanding your borrowing power can be tricky, so reach out to a HomeBridge Mortgage Loan Originator for more reverse mortgage information as it relates to you and your current situation.
Will I Have to Pay Any Reverse Mortgage Fees?
Those who take out a reverse mortgage will incur closing costs. These costs are normally rolled into the loan and the out of pocket fees are very minimal. Most are like those paid on any forward mortgage, and include:
- Origination fees paid to the lender
- A third-party fee
- Upfront mortgage insurance premium (MIP).
Origination fees are government regulated and based on the appraised value of the home. They typically don’t exceed $6,000, while third-party fees are much smaller in nature and include appraisal, title and inspection fees, among others. MIP is a fee paid directly to the FHA and, in most cases, is 0.5 percent of the property value. Over the course of the loan, borrowers are also expected to incur a cost of 1.25 percent annual MIP on the loan balance, and interest accrues on the balance.
When Do I Have to Pay Back a Reverse Mortgage?
The borrower is not required to pay back the loan until the home is sold or otherwise vacated. At that time, the loan must be paid back in full. Besides this, the only other obligations the borrower has are to maintain the home, perform any necessary repairs, and stay current on property taxes and insurance premiums. Otherwise, they risk default.
Still have questions about reverse mortgages? Contact a mortgage loan originator today!