What Is A Reverse Mortgage?
A reverse mortgage is an option for those aged 62 or older who may require funds to pay off a mortgage, pay for healthcare expenses, or supplement existing incomes. It permits the equity in a home to be converted into money without requiring the sale of a property or taking on extra bills.
Before applying, learn exactly how it works to determine if it’s a relevant strategy to pursue.
What Does A Reverse Mortgage Do?
A regular mortgage involves buying your house over a set period by making regularly scheduled installment payments. The reverse mortgage information outlined below highlights the major differences:
- With a reverse mortgage, the lender makes payments to you
- Equity is removed from the property in order for payments to be made, which are usually tax-free and unaffected by the benefits received
- Most don’t require the loan to be repaid for as long as you remain in the home. However, a loan repayment will be required should you sell, move elsewhere, or pass away
- In some instances, a non-borrowing spouse may be permitted to stay in the property after the principal borrower dies or leaves the home
- By borrowing against your property’s equity, the title to the home is retained. Payments received shouldn’t affect any government benefits you may be entitled to
Types Of Reverse Mortgages
There are three types of mortgages that fall under this unique category:
- Single purpose reverse mortgages: Available from government agencies and non-profit organizations, these are considered the least expensive of the three mortgage types. They can be used for a sole reason, as specified by the lender, such as improvements to a home or for property taxes. Majority of homeowners can qualify for these mortgages, even those with a modest income
- Proprietary reverse mortgages: As private loans, backed by individual companies, these mortgages often offer larger loans for those with properties high in value, especially if the high appraisal value is paired with a small mortgage
- Federally-insured reverse mortgages: Also referred to as Home Equity Conversion Mortgages (HECMs), these are supported by the US Department of Housing and Urban Development (HUD). Such loans can be used for any reason the borrower desires
The latter two are often more costly than single purpose mortgages and therefore may come with greater upfront costs. The amount that can be borrowed depends on criteria such as age, the type of mortgage, home value, and current interest rates. The older the applicant and the greater the equity, the more that can be borrowed.
What To Consider
There are certain things to consider if you’re contemplating the reverse strategy:
- Costs: Lenders usually charge closing costs plus an origination fee, along with ongoing servicing charges. There may also be mortgage insurance premiums
- Balance increases: With each payment made to you, interest is applied to money owed, so the outstanding balance increases with time
- Variable interest rates: Most mortgages won’t have fixed rates. Fixed rate mortgages do exist but tend to be more restrictive in how you can receive money
- Tax deductions: The mortgage’s interest isn’t tax deductible until loan repayments are in progress or completed
- Other costs: When retaining the title to the home, you must pay all other costs such as insurance, property taxes, and maintenance. Failure to do so may require loan repayment
- Spouses: A spouse that didn’t sign the mortgage may be allowed to remain at a property after your death, but will stop receiving money
Don’t Succumb To The Pressure
It’s important to understand that a salesperson isn’t guaranteed to have your best interests at heart, especially one who pushes the product and claims such mortgages will cure all financial worries. Be wary of a salesperson who provides opinions on how you should spend funds or one who sells a particular product and pushes these mortgages as a way to cover costs.
Always shop around and understand the costs involved and avoid signing up for other financial products simultaneously. It’s illegal to purchase other products to obtain a reverse mortgage. If you suspect fraud, inform the lender or loan servicer. Additionally, consider filing a complaint with your state attorney general’s office, Federal Trade Commission, or the Consumer Financial Protection Bureau.
Cancel At Anytime
A majority of these mortgages allow a three business-day grace period during which you can cancel the deal, without being penalized. It’s referred to as a borrower’s right to recession. If you wish to cancel then inform the lender in writing, send the reverse mortgage information by certified mail, and always ensure you get a receipt.
Tracking the letter acts as proof of when the lender receives the cancellation notice. Keep a copy of all your correspondence and make sure that the lender makes refunds of costs within twenty days.
A reverse mortgage is an attractive option for those who are 62 or older that require funds and are prepared to use equity accumulated in their home.
Keep in mind that the mortgage comes with additional costs, the likelihood of variable interest rates, and increases on the balance of the property. Always properly research options and avoid pressure to commit to a deal to ensure you arrive at the very best outcome.