About Reverse Mortgages
A reverse mortgage is a sort of loan for homeowners who are at least 62 years old and have a significant amount of equity in their homes. Seniors can access funds to pay for cost-of-living expenses late in life by borrowing against their equity, typically after they’ve exhausted all other resources or sources of income. Homeowners can acquire the cash they need with a reverse mortgage at rates as low as 3.5 percent per year.
What Is A Reverse Mortgage?
Consider a reverse mortgage to be a traditional mortgage with the roles reversed. A traditional mortgage is one in which a person takes out a loan to purchase a home and then repays the lender over time. In a reverse mortgage, the borrower already owns the home and uses it to secure a loan from a lender that they may or may not be able to repay.
The majority of reverse mortgage loans are not repaid by the borrower in the end. Instead, the borrower’s heirs sell the property to pay off the loan after the borrower moves or dies. Any extra revenues from the sale go to the borrower (or their estate).
How Does a Reverse Mortgage Work?
The procedure for taking out a reverse mortgage is straightforward: The process begins with a borrower who already has a home. The borrower has either a significant amount of equity in their house (typically at least 50% of the property’s value) or has entirely paid it off. The borrower determines that they require the liquidity that comes with reducing equity from their house and works with a reverse mortgage counselor to choose a lender and program.
The borrower then applies for the loan after selecting a specific loan package. The lender performs a credit check as well as an examination of the borrower’s property, title, and appraised value. If the loan is granted, the lender funds it, with the proceeds structured as a lump sum, a line of credit, or periodic annuity payments (for example, monthly, quarterly, or annually), depending on the borrower’s preference.
Borrowers use the money as specified in their loan agreement once a lender funds a reverse mortgage. Some loans are restricted in how they can be used (for example, for enhancements or renovations), while others are not. These loans are valid until the borrower dies or moves, at which point they (or their successors) can repay the loan or sell the property to repay the lender. Any money left over after the loan is repaid goes to the borrower.
Eligibility for a Reverse Mortgage
The youngest owner of a home being mortgaged must be at least 62 years old to qualify for a government-sponsored reverse mortgage. Borrowers can only use their primary residence as collateral, and they must either own their home entirely or have at least 50% equity with just one primary lien—in other words, borrowers cannot have a second lien from a HELOC or a second mortgage.
The Different Types Of Reverse Mortgages
The majority of reverse mortgages are insured by the government. Because they’re government-insured, these products, like other government loans like USDA or FHA loans, have requirements that normal mortgages don’t. These include criteria for eligibility, underwriting processes, funding sources, and, in some cases, restrictions on how funds can be used. There are also private reverse mortgages, which do not have the same stringent eligibility or financing rules as government-backed reverse mortgages.
Single-Purpose Reverse Mortgage
Reverse mortgages for a single purpose are usually the least expensive. Nonprofits and state and local governments give these loans for certain reasons that the lender specifies. Loans may be given for purposes such as repairs or renovations. Loans, on the other hand, are only available in particular places.
Home Equity Conversion Mortgage
The US Department of Housing and Urban Development backs home equity conversion mortgages (HECMs), which can be more expensive than traditional mortgages. Loan funds, on the other hand, can be utilized for almost anything. Borrowers have the option of receiving their funds in a lump sum, fixed monthly installments, a line of credit, or a mix of regular payments and line of credit.
Proprietary Reverse Mortgage
Private loans that aren’t backed by the government are known as proprietary reverse mortgages. Lenders determine their own qualifying criteria, interest rates, fees, terms, and underwriting procedures. While these loans are the simplest to obtain and fund, they are also known to attract unscrupulous practitioners who utilize reverse mortgages to defraud naïve seniors out of their home’s equity. Contact us for more information now.