What is a Reverse Mortgage Loan?

A reverse mortgage loan is a type of mortgage that is specifically designed for older homeowners who want to access the equity they have built up in their homes. The loan enables homeowners to access a portion of their home's equity by borrowing against it, rather than selling the property or taking out a traditional home equity loan which requires regular payments.

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Types of Reverse Mortgage Loans

There are various types of reverse mortgage loans available, each with its own unique features. The most common type of reverse mortgage loan is the Home Equity Conversion Mortgage (HECM). This federally insured program is available to seniors aged 62 and older and allows them to borrow against their home's equity without having to repay the loan until they sell the property, move out, or pass away. The loan amount that can be borrowed is based on the borrower's age, the value of the home, and the current interest rate.

Another type of reverse mortgage loan is the single-purpose reverse mortgage. These loans are typically offered to low-income seniors and can only be used for specific purposes such as home repairs or property taxes.

Proprietary reverse mortgages are private loans that are backed by the companies that develop them. These loans may offer higher loan limits and more flexible terms than HECMs, but they are not insured by the federal government.

A jumbo reverse mortgage is another option designed for homeowners with high-value homes. It fills a void created by the lending limits of the Federal Housing Administration's (FHA) Home Equity Conversion Mortgage (HECM) loan program. Jumbo reverse mortgages are a type of Home Equity Conversion Mortgage that enables property owners aged 62 years and older to convert their home's equity into cash without the need to sell the property.

Who Qualifies for a Reverse Mortgage Loan?

To qualify for a reverse mortgage loan, the homeowner must be at least 62 years old and own their home outright or have a significant amount of equity in it. They also must live in the home as their primary residence. The home must be a single-family home, a multi-family home with up to four units, a condominium, or a manufactured home that meets certain standards. The borrower must also undergo a financial assessment to determine their ability to pay for property taxes, insurance, and other ongoing expenses.

Key Features of a Reverse Mortgage Loan

One of the key features of a reverse mortgage loan is that the borrower does not have to make any regular mortgage payments. Instead, the loan balance accrues over time with interest and is only due when the borrower sells the property, moves out, or passes away. The borrower also retains ownership of the home and is responsible for maintaining it, paying property taxes, and keeping up with any other expenses related to the property.

Another key feature of reverse mortgage loans is the "non-recourse" aspect, which means that the borrower or their estate will never owe more than the value of the home when it is sold. This is because the loan is insured by the Federal Housing Administration (FHA) which guarantees that the lender will be repaid even if the loan balance exceeds the home's value.

Reverse Mortgage Loans and Home Equity Conversion Mortgages

Home Equity Conversion Mortgages (HECMs) are a type of reverse mortgage loan that is insured by the FHA. HECMs are the most popular type of reverse mortgage loan and account for many reverse mortgages made in the United States.

One of the advantages of HECMs is that they offer more flexibility than other types of reverse mortgage loans, such as proprietary reverse mortgages. HECMs allow borrowers to choose from several different payment options, such as receiving a lump sum payment, regular monthly payments, a line of credit, or a combination of these options.

HECMs also have specific requirements that must be met to qualify for the loan. For example, the borrower must attend a counseling session with a HUD-approved counselor to ensure they understand the terms and implications of the loan. The borrower must also maintain the property to FHA standards and stay current on property taxes and insurance.

Reverse mortgage loans can be a useful financial tool for older homeowners who want to access the equity they have built up in their homes without having to sell their property or take out a traditional home equity loan.

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What Is a Reverse Mortgage and Is It Right for Me?

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Reverse mortgages have long been marketed to older people who are “house rich and cash poor.” This kind of loan lets you tap into your home equity and get a check each month — while remaining in your house. But what sounds like a great idea, in theory, is often terrible in reality.

In this article, we’ll look at how reverse mortgages work, the associated costs and how you can get out of a reverse mortgage if you change your mind.

Here’s What You Need to Know About Reverse Mortgages. You often see older celebrities pushing reverse mortgages in TV commercials. The ads are all pretty similar: spokespeople telling you how great a financial move a reverse mortgage can be. But money expert Clark Howard disagrees.

“Reverse mortgages have been a source of calls into our show for at least a couple decades now,” Clark says. “The market has been dirty forever. You have to be so very careful. I know the ads that appear with the older actors who have high likeability ratings, but let me tell you, there are a lot of snakes in the grass.”

Table of Contents:
What Is a Reverse Mortgage?
How Does a Reverse Mortgage Work?
How Much Does a Reverse Mortgage Cost?
What Is the Downside to a Reverse Mortgage?
Can I Cancel a Reverse Mortgage?
What Are the Alternatives to a Reverse Mortgage?
What Is a Reverse Mortgage?

A reverse mortgage is a loan where a lender pays you every month — instead of the other way around — and draws down the equity in your home over time.

It’s called a reverse mortgage simply because it’s the exact opposite of having a loan in which you pay a lender every month and build equity.

Reverse mortgages target people who own their homes free and clear (or close to it) but need money to live. Traditionally, this has been senior citizens who aren’t getting enough from Social Security to meet their monthly bills.

How Does a Reverse Mortgage Work?

Home Equity Conversion Mortgages (HECMs). A single-purpose reverse mortgage lets you use the funds you get for one purpose and one purpose only — be it home repairs, improvements or property taxes — which is specified in the loan. These loans are typically offered by state and local government agencies as well as some nonprofit organizations. They’re not available in every state, but most low- and middle-class homeowners are able to qualify for them.

Proprietary reverse mortgages are the same except they’re available only through private lenders. They’re usually for people who own higher value homes.

HECMs are federally-insured reverse mortgages that don’t usually have any income requirement. They’re backed by the U. S. Department of Housing and Urban Development.

No matter which kind of reverse mortgage you choose, you either get a check every month or a one-time lump sum from the lender.

But remember, this is a loan with your house as collateral.

You usually don’t have to pay the money back as long as you’re living in your home. However, if you die, sell your home or move out, you or your estate must repay the lender. That usually means selling the home.

And keep this in mind: While you’re in the house, you’ll still be responsible for the property taxes, insurance, utilities, maintenance and everything else that goes along with owning the home.

How Much Does a Reverse Mortgage Cost? It depends:

“If you want to do this, you need to shop, shop, shop. Because not all lenders are created equal,” Clark says. “The fees vary tremendously from one to another.”

LendingTree says you should expect to pay a lender fee of whichever is greater: $2,500 or 2% of the first $200,000 of your home’s appraised value. If you have an appraised value greater than that, expect to pay an additional 1% of your home’s value above $200,000.

Other fees include closing costs, upfront mortgage costs and loan counseling, according to LendingTree.

Any legit lender will require you to go through independent third party financial counseling for evaluation to see if a reverse mortgage is appropriate for you. This is especially true for HECMs and, to a lesser degree, proprietary reverse mortgages. Fortunately, the cost of the counseling is nominal: often around $125.

What Are the Downsides to a Reverse Mortgage? Reverse mortgages remain a popular lure for cash-strapped seniors, but what’s good in theory is often terrible in execution.

First off, they’re packed with fees as noted earlier: Origination fee, Closing costs, Mortgage insurance premiums on select loans.

Meanwhile, if you take the lump sum cash-out option, that can put you in the crosshairs of sleazy insurance salespeople who’ll push a series of annuities on unsuspecting seniors.

“This is just an absolute, horrific abuse of trust and of that senior citizen,” says Clark.

Finally, a reverse mortgage, by its very design, takes part of your home equity and converts it into payments for you. As you use up the equity in your home in this way, there’s less to leave to your heirs. You should be aware of that before you decide.

Can I Cancel a Reverse Mortgage?. You can cancel a reverse mortgage thanks to a cooling-off period set by law. The FTC says you have three business days to cancel after you sign the contract.

This process, known as “rescission,” is best accomplished by putting your notice to cancel into a letter — and then send that letter to the lender by certified mail, return receipt requested.

Your letter should document any monies the lender got from you and when. The FTC advises you to keep copies of all your correspondence including any enclosures. Upon receipt of the letter, the lender has 20 days to refund anything you paid as a finance charge to get the loan going.

What Are the Alternatives to a Reverse Mortgage?
As you can probably tell by now, Clark Howard isn’t keen on reverse mortgages.

“If you’re talking about a family with younger members of means, it is generally better to have them financially help out an aging relative or relatives than to have a broker or salesperson take advantage of the senior with a reverse mortgage,” Clark says.

So it’s wise to consider the alternatives which include:

Selling your home and downsizing. Refinancing your home. Taking out a HELOC or home equity loan.

Selling to family. The first one is obvious and really comes down to a personal choice about whether you’re willing to move or whether you would prefer to age in place.

Second, if you’re looking to refinance, we have a guide to walk you through the process here.

Third, check out our article on home equity loans and home equity lines of credit (HELOCs), here.

Finally, there’s a rarely used alternative when aging parents have adult children who are of means. The grown children can actually lend their parents the money, like a bank reverse mortgage, but the equity flows to the kids — not to the bank.

National Family Mortgage is the only organization we know of that will draw up and manage one of these so-called “caregiver mortgages” on your family’s behalf.

Final Thought. Reverse mortgages are advertised heavily on TV and elsewhere with the promise that they can bring a lot of cash back into your life. But you’ve got to consider carefully if one is right for you.

“If you’re short of cash in retirement, a reverse mortgage may be an option for you — but it’s a last option,” Clark says. “The time to use it is when you’ve come up with every other way to pay for monthly expenses and you’re still short of money.” What Is a Reverse Mortgage and Is It Right for Me? Clark.com 

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