Everything to know about reverse mortgages
If you’re a senior, you also have a fourth option, too: A reverse mortgage.
This unique opportunity isn’t available to everyone but, if you need cash, it may be worth pursuing. Check out what you can qualify for now.
What is a reverse mortgage? A reverse mortgage is a type of mortgage loan that works in reverse. Instead of you making monthly payments to your lender, the lender makes payments to you. This might be a one-time, lump-sum payment, a line of credit or monthly payments over many years. Reverse mortgages are only for seniors — so borrowers 62 and older. In some cases, lenders may allow down to 55.
How does a reverse mortgage work? Reverse mortgages allow you to pull from your home equity. You can think of them as an advance on your home’s eventual sale: The lender pays you or gives you a line of credit to withdraw from, and once you no longer live in the home (you sell it, move to a long-term facility or pass away), the balance comes due. You or your heirs can then repay the lender out of pocket or via your home’s sale proceeds.
While you’re in the home, you make no payments to your lender. You also won’t owe taxes on the reverse mortgage payments you receive either. The IRS considers them loan proceeds — not taxable income.
How much money can you get from a reverse mortgage? A lot of factors impact how much money you can get from a reverse mortgage, including the age of the youngest borrower, how much equity you have in your home and the type of reverse mortgage loan you’re choosing.
With a Home Equity Conversion Mortgage (HECM) — a type of government-backed reverse mortgage — you can receive up to $970,800. Some lenders offer private loan options that offer well into the millions.
If this sounds appealing to you, you can easily get started right now. Lenders can assist you and let you know how much money you can potentially get out of your home.
How much does a reverse mortgage cost? There are several costs associated with reverse mortgages. First, there are upfront closing costs. These include things like origination fees, appraisal fees, title search fees, costs for a credit check and more. The cost of these fees varies widely by lenders, but on HECMs, just the origination fee can equal as much as $6,000.
You will also owe a Mortgage Insurance Premium (MIP) on HECM loans. Upfront, this costs 2% of your total reverse mortgage amount. And you’ll pay the MIP annually — 0.5% of your outstanding loan balance — and may have a monthly service fee (this is capped at $30 to $35, depending on the type of interest rate you have).
Your lender may let you finance your closing costs and use your loan payments to cover them. Just remember: This will reduce the amount of cash you can access in the long run.
What are the basic requirements to get a reverse mortgage? If you’re using a government-backed reverse mortgage (HECM), you’ll need to be at least 62 years old to qualify.
Live in the house as your primary residence
Be current on all federal debts
Have the funds to continue paying property taxes, home insurance premiums and HOA fees
Participate in a HUD-approved HECM counseling session
Private reverse mortgages may have different requirements. For example, Reverse Mortgage Funding offers a reverse mortgage that’s available to borrowers 55 and up.Who would benefit from a reverse mortgage? Reverse mortgages can be helpful if you need extra income in retirement. They also help free up cash flow, as they eliminate your monthly housing payments.A reverse mortgage isn’t a good idea if you don’t have the money to cover insurance and taxes on your property. HECMs require borrowers to stay current on these charges while they live in the home. Failing to do so could lead to foreclosure.
Two more things to know about reverse mortgages. If you’re considering a reverse mortgage, make sure you have a plan for your property should you pass away. While you can still leave the home to an heir, they will be responsible for any loan balance you leave behind. This might mean paying off your reverse mortgage out of pocket or, in many cases, selling your home to repay the lender. In most cases, the balance will come due in 30 days.
Finally, be diligent when choosing which lender to work with. Reverse mortgage scams are common, so learn to recognize the red flags. These might include high-pressure sales tactics or not disclosing the fees and risks associated with these loans. You should search and compare lenders to find the best one for you.
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