Seniors and retirees who are struggling financially should consider a reverse mortgage. If they need extra income, money for health care, or want to pay off their current mortgage, they could qualify to start using the equity in their home. This can be a good idea if you are over 62, have at least 50% equity in your home, and plan to continue living in and maintaining the home for the foreseeable future. Simply put, a reverse mortgage is a loan against the value of your home. It allows owners to turn their capital into cash.
What is a Reverse Mortgage?
A reverse mortgage uses your home as collateral. This type of loan pays the homeowner for the equity they already have in their home. The owners do not have to pay anything upfront. They just need to qualify for the lender’s guidelines and decide how they would like their payment distributed. Over the life of the loan, the homeowner’s debt increases as the equity in the home decreases. Once the owner moves out or dies, selling the home pays off the reverse mortgage.
As home values have risen in recent years, many retirees and seniors may be holding far more equity in their homes than they ever thought possible, which could make a reverse mortgage an interesting option.
Types of Reverse Mortgages
Home Equity Conversion Mortgage (HECM)
- The loan is federally insured and supported by the US Department of Housing and Urban Development.
- The loan is commonly used for reverse mortgages as their requirements have no income or medical limitations.
- Advice is needed so that the owner fully understands the risks involved, the costs associated with the loan and the payment options.
- Current interest rates, the age of the owner and the value of the house determine the amount that can be borrowed.
- A HECM is generally a more expensive mortgage to obtain due to high upfront costs and fees.
- Being supported by state and local nonprofits helps keep interest rates and other costs low.
- Restrictions are put in place. The lender only approves the loan for a single-use item, such as taxes or home repairs.
- The loan is not readily available in all states.
- Reimbursement is not required until the owner dies, moves or changes ownership.
- This type is backed by private lenders and generally used for higher value homes. The loan limit for a HECM is $970,800. So if your home is worth more than this loan limit, a homeowner’s mortgage can be a great way for you to get more money out of the home.
- Advice may be needed so that the owner understands the difference between this type of loan and the HECM and sees the advantages and disadvantages of each.
- Mortgage insurance is not required with an Exclusive Reverse Mortgage, as it is not federally insured.
How do you receive funds from a reverse mortgage?
Several options are available for receiving funds from a reverse mortgage. It depends on what you will be using the money for, how much you want to take, and what works best for you and your situation. As with any type of mortgage or loan, shopping around is encouraged. It’s worth getting quotes from multiple reverse mortgage lenders to get the best interest rates and the best overall deal.
Lump sum payment: This allows you to receive all the money you borrow in one payment at the closing of the loan. Then you decide how to divide it and use the money.
Annuity: Also known as an occupancy plan, this option gives you equal monthly payments as long as you live in the house as your primary residence. It’s basically about living on a fixed income and knowing exactly what to expect each month.
Term payments: Equal monthly payments are granted with this option for a fixed term. Many borrowers ask for a term of 10 years.
Credit line: With this option, the money is there and available to the owner to access it when needed. Interest only applies to borrowed money. It’s a great option for someone who wants to know they have cash on hand, but can also decide if they really need to use it or not.
Monthly payments plus line of credit: Equal monthly payments are granted in this option, but the line of credit is still available if desired.
Term payments plus line of credit: In this option, the owner decides the duration of the payments (usually 10 years) but still has access to a line of credit during and after the end of the duration.
Who benefits from a reverse mortgage?
As long as you are over 62 and have at least 50% equity in your home, you can qualify for a reverse mortgage. Maybe funds are needed for medical bills, living expenses, or something unexpected. As a senior who does not work, it is difficult to know what to do in the event of an increase in the cost of living or the unexpected. A reverse mortgage can be of great help in times of financial difficulty.
This money is already essentially yours because it comes from the equity in your home. You can use it for whatever you need or want as long as it’s not a one-time reverse mortgage. Even grandparents who wish to contribute to their children’s or grandchildren’s education, weddings, or expenses may consider this a viable option for additional income.
Disadvantages of Reverse Mortgages
A disadvantage of a reverse mortgage is if someone lives with you who is not on the deed. When the house finally sells, they may have no rights to the assets. If you don’t tell them how the reverse mortgage works or you have one, they will be shocked when the lender wants their money. It can be a tricky situation if you’re not upfront with the other people who live with you while you have a reverse mortgage.
The scams are out there, and the risks are involved. Some companies rip off seniors with promises of quick money and low fees, so be careful and make sure you’re using a reputable reverse mortgage lender. Do your research and consult the National Reverse Mortgage Lenders Association if you need help finding a suitable lender, or keep reading to discover Benzinga’s favorite reverse mortgage lenders.
Best Reverse Mortgage Lenders
As always, Benzinga can take care of some of the hassle for you. Benzing has already found the best reverse mortgage lenders so you don’t have to. Simply contact one of these great lenders and get started today.
30 – 40
Luxury Mortgage offers standard products such as Conventional Loans, VA Loans, Jumbo Loans, and FHA Loans. It also offers more specialized products such as bank statement loans, asset-qualifying mortgages, and no-doc home loans. If you’ve had trouble finding a mortgage due to irregular income, being retired, or buying an investment property, Luxury Mortgage is worth a look.
- Independent professionals
- Condominium buyers
- Wide variety of mortgage products
- Niche products like bank statement loans
- Works with many state homebuyer assistance programs
- Only available in 29 states
securely via the Quontic Bank website
Now that you know what exactly a reverse mortgage is, ask yourself if it’s something you might be interested in. You need to decide which type of reverse mortgage is right for you and how you want to receive your principal. Take advantage of the necessary advice and ask questions. Make sure you understand what your reverse mortgage lender is telling you. And as always, come back to Benzinga for more information to ensure you have the latest financial options.
Frequently Asked Questions
Is a Reverse Mortgage Really Worth It?
Is a Reverse Mortgage Really Worth It?
In a word, yes. As long as you’re smart about it, a reverse mortgage can really help you through your later years. Having equity in your home means having money right there. So you can continue to enjoy your home and use the increase in value to your advantage. It is not necessary to repay it until your death or the sale of the house.
Can you lose your home with a reverse mortgage?
Can you lose your home with a reverse mortgage?
It’s possible. With a reverse mortgage, you must continue to pay your property taxes and home insurance and keep your payments up to date. You should also track repairs and maintenance. If you don’t, the reverse mortgage lender may demand repayment. Alternatively, if you leave the house for more than a year – even if it’s to live in an assisted living facility or something similar – the reverse mortgage will become due. At this point, you can try to sell the house to pay off the reverse mortgage, otherwise the house could be foreclosed.
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