Mortgage

What Is a Reverse Mortgage?

If you’ve never heard of a reverse mortgage before, then it’s likely a big relief once you learn what it can do for many older people. Unlike a conventional loan, reverse mortgages pay you.

The home owner is still responsible for paying insurance and taxes on the property. You must always live in the property you take a reverse mortgage on as the primary residence, for as long as the loan stands.

In order to qualify for a reverse mortgage, you have to be at least 62 years old. That’s because this type of financial product is designed to supplement retirement incomes.

Unlike with a standard mortgage, there are no monthly mortgage payments to make with a reverse loan. Instead, you are paid monthly based on the value of your home.

Qualifying for a Reverse Mortgage is Not Overly Restrictive:

  • Must be at least 62 years of age
  • You own your home and it’s your primary residence
  • The house is single family, multi-family (up to 4), or an approved condominium or manufactured home
  • You own your own home free and clear or only have a small amount left to pay on the existing mortgage
  • Your home is in good condition prior to taking out the loan

How Reverse Mortgages Work

Reverse mortgages can be a good thing because they allow you to turn part of your home’s equity into cash. Most retired people don’t have multiple streams of income to rely on, that’s where reverse mortgages come in handy.

This type of loan is called a reverse mortgage because the lender makes payments to the borrower, rather than lenders paying the borrower every month. As long as the borrower remains in the home as their primary residence, then they’re not required to make monthly payments towards the accumulating loan balance.

Once the borrower dies, the reverse mortgage then becomes payable by the borrower, which is now the next of kin. Typically, the next of kin will choose to sell the house at this point, and cover the costs of the reverse mortgage. Depending on your situation, this can be an excellent way to supplement your retirement income, and your next of kin can simply sell the home after you’re gone.

As long as the borrower lives in the home, they do not have to make any monthly payments at all to the lender. Essentially all equity in the home is paid out to the homeowner making it a very useful retirement planning tool for certain households.

How Much Can You Get?

There are several factors that determine the amount of money able to be borrowed like:

  • The borrowers age (or the age of the youngest spouse in the case of couples)
  • The value of the home
  • Interest rate of loan
  • Lesser of appraised value or the HECM FHA mortgage limit of $679,650.

That’s correct, the maximum you can receive is of $679,650. After that amount, it is considered a jumbo reverse mortgage and other stipulations and qualifications apply.

It’s important to mention that you must either own your home completely, or be very close to paying off your mortgage in order to qualify for a reverse mortgage at all.

There are no restrictions to how you can use the money given to you by a reverse mortgage. If you have a fixed-rate mortgage, then you must receive the reverse mortgage as one lump sum. If, however you use an adjustable rate mortgage then you can collect payments as a lump sum, fixed monthly payment, line of credit, or some other combination.