One of the most frequent questions we get from both borrowers and agents is “What is a reverse mortgage, and will it benefit me? ” Let’s take a closer look at the reverse mortgage (you may also hear it called a Home Equity Conversion Mortgage, or HECM).
A reverse mortgage is designed for homeowners and homebuyers who are over 62 years of age and either have substantial equity in their home or are putting down at least 30-40% on a new home.
For the homeowner, they can use this equity to remodel, payoff credit cards, travel, or simply forgo having a monthly payment on their home. For the homebuyer, it can be used to purchase a new home and have no house payment. (This can be extremely beneficial for those on fixed incomes.)
The reverse is FHA insured, which helps protect the consumer against being charged excessive fees. The amount of the reverse mortgage will be based on the age of the youngest borrower and an FHA appraisal. For example, if the borrower is 69 years old and owes nothing on his house, he would be able to get 60% of the appraised value on his house. An example would be, if his or her home appraised for $200,000, then the borrower could get either a line of credit or a one-time loan of $120,000. The benefit to the homeowner is that none of the principal or interest would have to be paid back until their death or when the house stops being their primary residence. The only requirement the lender puts on the borrower after closing is that it has to be insured and property taxes – if not exempt – must be kept current. The borrower would have no further mortgage payments and the property would always remain in the borrower’s name. Upon the death of the last living borrower, their estate would have the opportunity to pay the loan off. If they chose not to pay the loan off, then the lender would sell the property with no further liability to the estate.
Who is eligible?
- Borrowers 62 years old or older.
- Must live in the house as primary residence and plan on continuing to live in the home.
- Be able to pay property taxes, homeowner’s insurance and maintain the property.
How can the borrower receive the funds from a reverse mortgage?
- Lump Sum – Draw all available funds at closing
- Line of credit – Allows you to draw funds at your discretion
- Tenure – Equal monthly installments for as long as you live in the home
- Term- Equal monthly installments over a fixed period of time
A reverse mortgage can be a very beneficial financial tool for senior adults on a fixed income or those who need to tap into their home’s equity.
There are many different types of reverse mortgage products so be sure to talk with a mortgage professional about your options and if it would be right for your situation.