What Is A Reverse Mortgage And How Does It Work?
A reverse mortgage is a type of house loan that allows homeowners aged 62 and up to turn equity in their property into cash. Instead of you paying your lender, your lender pays you — the "reverse" of how you'd pay a regular "forward" mortgage.
Reverse mortgages are becoming more popular as a retirement planning strategy for homeowners with considerable equity in their houses — or who own their homes outright — and who want flexible access to their wealth. Homeowners will, however, face higher borrowing fees, and reverse mortgage laws state that they are still accountable for ongoing payments.
What is a reverse mortgage and how does it work?
In comparison to a traditional mortgage, a reverse mortgage includes a lot of moving components. With a reverse mortgage, you'll be able to:
The most essential aspect in determining how much you qualify for is your age. Although a reverse mortgage requires a minimum age of 62, older borrowers have higher reverse mortgage borrowing capacity. For married couples, there's a snag: lenders base the maximum loan amount on the youngest borrower's age.
In most circumstances, you must have at least 50% equity. Lenders establish a significantly higher beginning equity threshold than standard mortgage programs to guarantee you don't wind up owing more than your house is worth. In order to acquire an unbiased estimate of your property's worth from a professional real estate appraiser, a home appraisal is always necessary as part of the reverse mortgage procedure.
You're not required to fulfill any debt-to-income (DTI) ratios. Because there is no mortgage payment, there are no DTI ratio restrictions, which are a crucial issue in obtaining a conventional loan. You must, however, demonstrate that you have the financial means to cover continuing homeownership expenses such as homeowners insurance, property taxes, and upkeep.
The amount you qualify for will be influenced by your interest rate. Because monthly interest costs are added to your loan, the lower the interest rate, the more you may borrow.
You now have additional options for converting your stock into cash. Instead of paying monthly payments, you can use one or more of the six options below to access your equity:
- It's a lump sum. This option entails receiving a single substantial payment once your loan is closed, allowing you to build up your financial reserves to spend as needed. An extra benefit of this option: The interest rate on your loan will be fixed.
- Tenure. Regular monthly payments are available as long as you or a co-borrower live in the house as your principal residence.
- Term. If you want additional money for a few years, this option allows you to select a certain amount of months for which you will get regular monthly payments.
- A credit line is a type of loan. The line of credit option may be a suitable fit if you desire an extra cushion to meet unforeseen expenditures as you become older. It works in the same way as a credit card or a home equity line of credit (HELOC), allowing you to borrow money as needed up to the available balance.
- Tenure has been changed. If you wish to establish up a line of credit as well as receive a monthly payment amount for as long as you and a spouse or co-borrower dwell in the house, choose this option.
- The word has been changed. You can add a line of credit to a monthly payment plan that you get for a specific period of time.
A meeting with a housing counselor will be necessary. Before qualifying for a reverse mortgage, the US Department of Housing and Urban Development (HUD) requires counseling from a HUD-approved counselor to ensure you fully grasp all of the benefits and drawbacks.
If you leave the house, your loan may be foreclosed. Reverse mortgage owners should be aware of the "triggers" that might lead to a reverse mortgage foreclosure, which include:
- One or both of the owners' deaths
- Evidence indicating the borrower is not using the property as his or her primary residence
- Notification of unpaid property taxes or homeowners insurance Assertion that the house isn't being cared for
Reverse mortgages come in a variety of shapes and sizes
The majority of borrowers choose for a Federal Housing Administration-backed Home Equity Conversion Mortgage (FHA). The most typical kind of reverse mortgage is a home equity conversion mortgage (HECM), which protects lenders from losses by charging borrowers mortgage insurance while also giving customers with the assurance of a needed "second opinion" from a neutral reverse mortgage counselor.
Private lenders also provide reverse mortgages, albeit the rules stated below are specific to HECMs. The majority of homeowners select between three types of reverse mortgages:
Home Equity Conversion Mortgages (HECMs) are a type of home equity loan (HECMs). A HECM's funds can be utilized for anything. A "maximum claim amount" applies to HECMs, limiting how much a homeowner can borrow. In 2022, the maximum claim amount for a HECM in all regions of the country, including Guam and the US Virgin Islands, will be $970,800.
Reverse mortgages that are owned by a company. Private firms provide reverse mortgage options with loan amounts that are larger than the FHA's HECM loan restrictions. You may be able to borrow more money right now than with a HECM, but these proprietary reverse loans are not insured by the federal government and may be more expensive.
Reverse mortgages with a single objective. Special reverse mortgages may be available from state and local government organizations to satisfy specific homeowner requirements, such as paying back taxes or making repairs to make a house safe and livable. However, they are not available in every state.