People associate a mortgage with the opportunity to purchase a home. Since 1961, older U.S. homeowners can take out a reverse mortgage to access equity in their home to help with all sorts of financial needs.
Let’s explore reverse mortgages and learn why some homeowners opt for them.
What is a reverse mortgage?
Reverse mortgages allow homeowners to borrow money using their home as security for the loan. Like a traditional mortgage, when you take out a reverse mortgage loan, the title of your home remains in your name. Unlike a conventional mortgage, however, borrowers with a reverse mortgage loan don’t make monthly mortgage payments. Any interest and fees accrued are added to the loan balance each month, growing the balance. The loan is repaid when the borrower no longer lives in the home.
When can I apply for a reverse mortgage?
Reverse mortgages have age restrictions commonly requiring an age of 62 or older. There are limited options available to seniors starting as young as 55. The reverse mortgage must be for your principal residence, and you need to be current on all federal debts, such as student loans. You can, however, pay off your mortgage or federal debts with funds from a reverse mortgage.
Additionally, you will need to stay current on obligations including ongoing taxes and insurance, maintenance, and repairs. Borrowers must also undergo counseling to ensure that a reverse mortgage is a good fit. Reverse mortgage counseling helps borrowers understand the ins and outs of a reverse mortgage, empowering them to make an informed and thought-out choice.
Why do some people consider a reverse mortgage?
Borrowers often use a reverse mortgage as supplemental income, to pay off a mortgage, or to help with healthcare expenses.
With longer life expectancies and rising expenses, retirement savings and Social Security benefits may not cover expenses or allow seniors to do all they want. Reverse mortgages can enable borrowers to age in place or even move to a new home.
How do I get the money in a reverse mortgage?
There are several options to receive distributions from a reverse mortgage.
With an adjustable rate reverse mortgage, you can select from a combination of the following distribution options:
- A lump sum
- A line of credit
- Monthly payments for the duration of someone living in the home
- Equal monthly payments for a set term length
You can also choose a fixed-rate reverse mortgage, although the only distribution option is an initial lump sum.
When will I have to repay a reverse mortgage?
Once secured, the reverse mortgage repayment only occurs when you sell the property, move, or upon death. Repayment will include the borrowed money, accrued interest, and any unpaid fees.
Reverse mortgages are typically non-recourse loans. Only the home will be used to pay off the mortgage balance when the loan becomes due. You and your heirs will not have personal liability for repaying the mortgage.
Can a reverse mortgage impact my heirs?
You may want to talk with your heirs if you consider a reverse mortgage. Sharing about why you are taking out a reverse mortgage communicates your priorities. It keeps everyone in the loop and informed, as your heirs will still own the home after you pass. They will also want to know certain rules, like notifying the lender within 30 days about their plans for the home.
Information about the process can help your heirs plan for settling your estate. Your heirs can decide to pay off the mortgage and keep the home or sell the home and use the proceeds to repay the loan, retaining any remaining equity.
Are there different types of reverse mortgages?
There are two types of reverse mortgages:
HOME EQUITY CONVERSION MORTGAGE (HECM)
- The most common reverse mortgage
- Federally insured by the U.S. Department of Housing and Urban Development
- Includes higher up-front costs and is often more expensive than traditional home loans
- No income limitations or medical requirements
- Loan amounts up to the FHA lending limits
- Age 62 or older
- Counseling is required
- Use the loan for any reason
- Options for loan disbursements
- Non-recourse loan
PROPRIETARY REVERSE MORTGAGE
- Backed by private lenders
- An option for homes appraised at values exceeding the HUD limit
- Loan amounts up to $4 million
- Age 55 or older
- Counseling may be required
- Choose a lump sum or monthly payments
- No upfront mortgage insurance premiums
- Non-recourse loan
What are the drawbacks of a reverse mortgage?
You will be borrowing money, even if payments aren’t due while you’re in the home. So, with any reverse mortgage, you increase your debt and reduce equity. If you later decide to move or require assisted living, you may have less money to use. Lenders may require fees and interest, even if the interest is rolled into the mortgage.
What are alternatives to a reverse mortgage?
If you’re not sure a reverse mortgage is right for you but want to borrow money, there are other options:
- A home equity line of credit (HELOC) can be a less expensive option for borrowing against your home’s equity. See Fremont Bank’s home equity options.
- You can explore refinancing your mortgage, especially with a shorter term, like 10 or 15 years. (subject to qualification)
- Moving to a lower value property can reduce expenses and may provide a cash influx depending on property values.
Have more questions? Reach out to one of our Loan Officers at (866) 936-2635.