UNDERSTANDING REVERSE MORTGAGES AND HOW THEY WORK
A reverse mortgage provides a way for senior Americans aged 62 years and above to get their homes’ equity and use it to finance their retirement. If you are a senior contemplating getting a reverse mortgage, this guide provides you with everything you need to know. But an important thing to note is that strict rules stipulate who can qualify for this kind of mortgage, how much income a reverse mortgage can bring in, and the cost.
What is a reverse mortgage?
A reverse mortgage is only for homeowners aged 62 years and above. It allows the borrower/homeowner to convert a portion of their home’s equity into tax-free cash without any required monthly payments. It is known as a reverse mortgage because, rather than paying the lender in monthly installments like the conventional mortgage, the lender makes monthly payments to the borrower.
A common type of reverse mortgage is hecm (home equity conversion mortgage) provided by the U.S. Department of Housing and Urban Development (HUD). However, it is not a government loan. Instead, mortgage lenders are offered but insured by the Federal Housing Administration (FHA) under HUD. It allows you to acquire a loan using your home as collateral. You receive home equity loan payments from a bank as ongoing payments or as a lump sum, depending on the percentage of the sum of home equity you have accumulated in the course of owning your home.
What are the requirements to be approved for a hecm?
There are several requirements you must meet to qualify for a hecm, including:
- You must be 62 years and above.
- The home you seek a reverse mortgage for must be your primary residence – where you spend the most significant part of your time in a year.
- When you apply for a team, you must own the home outright or have a minimum balance on the house.
- You must not be negligent of any federal debt, including taxes and student loans. But, you can use your reverse mortgage funds to pay off such debts.
- It would help if you were willing to set aside a portion of the reverse mortgage funds at closing or have additional funds to pay for property insurance, taxes, repair, and maintenance costs.
- Your house must be in good condition to get approved for a reverse mortgage and engage in counseling facilitated by a HUD-approved reverse mortgage counseling facility. The counseling session involves determining your eligibility for a reverse mortgage, and the counselor also guides you on the financial impacts of the mortgage.
How is the money paid out?
The amount of loan you can get through a reverse mortgage is dependent on your age as a borrower or the age of the youngest spouse if you are a couple. It is also reliant on other factors, including the home’s value of appraisal and current interest rates.
You have many choices when choosing how you want to receive your reverse mortgage payments, including:
- Line of credit where you only need to write a request to the loan servicer.
- Term payments, for example, monthly payments.
- Tenure payments that you get for as long as you live in the home.
If you are contemplating borrowing a reverse mortgage, it is best to do extensive research and shop around to get a good deal.