A Reverse Mortgage is a type of loan that allows homeowners age 62 and older to tap into the equity of their home so they can utilize it to their advantage. The very first reverse mortgage was designed in order to help a widow remain in her home after the loss her husband’s income. Today, reverse mortgages are helping many people manage income and expenses through their retirement years using the equity they have accrued.
When a homeowner obtains a reverse mortgage, as long as they live in the home, they are not required to make monthly mortgage payments. Alternatively, the lender will make monthly payments or a lump sum payment to the homeowner. In addition to the monthly or lump sum payments, the homeowner can also obtain an equity line of credit that they can use for any purpose they deem necessary. The homeowner is still required to maintain the property and pay any home insurance, property taxes, and any homeowner’s association dues related to the property. The loan is not required to be paid back until one of the following events occur: the homeowner sells the home, the home is vacated, or the homeowner passes away.
- No Credit Needed – FICO scores are not evaluated for reverse mortgages so even if you have bad credit or no credit at all, you can still qualify.
- Minimal Income to Qualify – Since you will effectively eliminate your mortgage payment with a reverse mortgage, you only need to demonstrate a willingness and capacity to pay for the home insurance, property taxes, and any HOA dues (if applicable) for the property.
- Zero Restrictions on the Use of Loan Proceeds – It’s your equity, use it how you wish. This provides greater financial flexibility and allows you to supplement your existing income throughout your retirement years. Loan proceeds are also non-taxable.
- Reverse Mortgages are Non-Recourse Loans – This means that in the event of a default on your loan, the lender can never seek any damages outside of the collateral (property) even if the collateral is worth less than what you owe.
- Your Heirs Will Always Be Protected – No debt will be assigned to your beneficiaries when the loan becomes due. Your family will be given a period of time to pay the loan in full or sell the home. In addition, they will also be given the opportunity to buy the property for 95% of the appraised value, even if the house appraises for less than what is owed on the loan.
- Use a Reverse Mortgage to Make a New Home Purchase – Utilize the equity that you have developed in your current property to downsize or relocate to a new property without ever having to make a mortgage payment on the new property you will acquire. This can help borrowers keep their savings in the bank, improve monthly cash flow and finance a property which would have otherwise been outside of their budget.
- Borrowers must be at least 62 years of age or older.
- Borrowers must have enough income to pay any property taxes, homeowner’s insurance, or HOA dues if applicable.
- You can either own your home free and clear, or you will have to have enough equity in the home to pay off any existing loans you currently have on the property. As long as you fit in one of these two categories, you can qualify for a reverse mortgage.
- Borrowers and non-borrowing spouses must receive HUD approved counseling in order to obtain a reverse mortgage.
A Reverse Mortgage comes in two general types, traditional and jumbo. Traditional Reverse Mortgages are insured by the Federal Housing Administration (FHA) and have loan limits up to $636,150 regardless of the home’s value. Jumbo Reverse Mortgages allow for higher loan amounts on properties valued up to $6 million. There are several different Reverse Mortgage options:
Loan Proceeds – The borrower has the choice to receive the loan proceeds as a line of credit, number of monthly installments, a combination of both, as a lump sum, or the proceeds will simply eliminate the current mortgage.
Interest Rate – Choose between fixed and adjustable rates. A fixed interest rate is only available with the lump sum payment option and on Jumbo Reverse Mortgages.
Purchase – Usually requires less money money out of pocket than an all cash purchase. The purchase option can be great for borrowers that are looking to downsize or relocate to be closer to family members in their later life years.
Refinance – This option allows you to refinance your existing reverse mortgage into a new reverse mortgage. Two reasons for refinancing would be to either lock in a lower interest rate than what is currently held, or to pull more cash from equity if the property has increased in value.