With a reverse mortgage, homeowners receive money from the lender instead of paying money to them—they are the reverse of a traditional mortgage. Reverse mortgages are available to homeowners who are over the age of 62 who live in their home and either own it outright or have a minimal remaining mortgage balance.
Homeowners can choose from several types of reverse mortgages. To ensure they receive the best value for their home, homeowners should thoroughly research all of their options and speak to a financial advisor before signing any paperwork.
What facts should you know about reverse mortgages?
The debt limit is the total amount of debt the borrower incurs. It includes all loan amounts, interest payments and financing fees.
- Based on home equity: The total amount the debtor borrows is based on his or her equity in the home.
- You keep surplus: If the debt limit is less than the total value of the home at the time the borrower pays it off, the borrower gets to keep the surplus.
- Cap based on home value: The lender cannot demand more from a borrower in repayments than the home is worth.
In most cases, the debtor must own the home outright in order to take out a reverse mortgage, although some reverse mortgages make an exception.
- Pay off old mortgage: If the homeowner has only a few mortgage payments left, the reverse mortgage must be used to pay it off before any cash disbursement.
- Cash payment based on home equity: The homeowner receives cash payments based on his or her equity in the home and age.
- Responsibility doesn’t transfer: The debtor remains the homeowner of record and is therefore responsible for home insurance premiums, property taxes and maintenance costs.
The reverse mortgage lender charges financing fees based on the borrower’s home equity and costs of providing the loan. Borrowers can wrap most of these fees into the balance of the reverse mortgage.
- Lender fees: Lenders charge a fee for originating and servicing the loan that can be paid upfront or when the loan enters repayment.
- Mortgage insurance premiums: Borrowers must pay for mortgage insurance throughout the life of the loan to make sure the lender gets repaid if the borrower defaults on the loan.
- Interest rates: Lenders charge interest each month based on the amount of money the borrower owes.
Reverse mortgages become payable at the end of the life of the loan. Borrowers, or their heirs, may be liable for the full payment once the loan ends. They have the option of selling the house and turning over proceeds to the reverse mortgage lender or repaying the loan with other funds if they want to keep the house.
- Payments begin when the borrower moves out: If the borrower moves out of the home, the reverse mortgage becomes due.
- Payments begin after the borrower’s death: If the borrower dies while still owning the home, his or her estate is liable for the cost of repayment.
- Acceleration: Under certain conditions, such as the borrower renting out part of the home, the loan can become repayable while the borrower is still living in it.
Right of cancellation
Borrowers have limited rights to cancel a reverse mortgage once they enter it.
- Three business days: In most cases, borrowers have three business days to cancel a loan; many lenders count Saturday as one of these three days.
- Done in writing: Borrowers must write a letter requesting the loan be canceled.
- Lender provided form: Most lenders provide a form borrowers can fill out within the three day period to cancel the loan.
The loan amount is the amount of money the borrower actually receives when he or she takes out a reverse mortgage. The amount that can be borrowed depends on your age, the appraised value of the home and loan limits in the area. It differs from the debt limit, which includes interest payments.
- Lump sum payment: The borrower receives one check with the entire loan payment.
- Short term recurring loan: The borrower receives a monthly check for a specified period of time.
- Long term recurring loan: The borrower receives a monthly check until he or she moves out of the house or passes away, whichever comes first.
What are different types of reverse mortgages?
Home Equity Conversion Mortgage (HECM)
Home equity conversion mortgages, or HECM’s, are the only type of reverse mortgage that is insured by the federal government. The insurance premiums are paid by the borrower but protect the lender in case the home’s value is insufficient to repay the full mortgage when the loan becomes due. This type of loan gives borrowers the largest amount of money; upper limits are based on the borrower’s age and the amount of equity he or she has in the home. Borrowers can use the money for any purpose they wish.
Deferred Payment Loan (DPL)
Many state and local governments offer deferred payment loans, or DPL’s. These loans are provided for the purpose of completing specific home repairs. DPL’s can be difficult to find and apply for.
Property Tax Deferral (PTD)
Property tax deferrals are state-provided loans that are used to pay property taxes owed. The borrower takes the loan out against the value of his or her home. These loans may require borrowers to have less than a certain amount of income and to be over the age of 65.
Proprietary Reverse Mortgages
Private companies sometimes offer proprietary reverse mortgages. These mortgages may provide a larger payout than HECM’s, however, they may be more expensive. These mortgages are not insured by any government agency and are financed only through lenders approved by private developers.
Who should consider reverse mortgages?
Senior citizens on fixed income
People over the age of 62 who own their own home qualify for reverse mortgages. Many seniors who depend on a fixed income from Social Security or other retirement programs use reverse mortgages to supplement their income.
Seniors who want to enjoy their later years
The older the borrower is when he or she takes out the reverse mortgage, the more loan proceeds he or she is entitled to. People over the age of 75 tend to get much higher loan payments, and many use the money to finance new experiences during their later years.
Seniors who expect their house’s value to rise
When a borrower moves out of the house or dies, the loan becomes due – but the borrower or his or her heirs gets to keep any surplus from the sale of the house. So if a senior expects the house to rise in value, he or she might take out a reverse mortgage and plan for heirs to receive the surplus once the loan is paid off.
Best Reverse Mortgage Lenders
Published by Jan Falcone On January 14, 2019