What Is a Reverse Mortgage
Are you a retiree? Maybe you’re getting close to retirement? There is a mortgage program you’ve probably heard of but it can take a bit of explaining. Just the term “reverse mortgage” sounds counterintuitive. What does the term mean? The term “reverse” is compared to a “forward” mortgage. A forward mortgage is just a regular home loan. It just means that as the loan ages, the loan balance is paid down. A reverse mortgage works differently. A reverse mortgage delivers funds to the borrowers and there are no required monthly payments. How can there be a loan that doesn’t require monthly payments?
A reverse mortgage is actually a Home Equity Conversion Mortgage, or HECM. This is an FHA program that converts a portion of a homeowner’s equity into cash. There are also “jumbo” reverse mortgage loans as well. This is not a cash-out refinance loan where the borrowers must qualify based upon income, credit and assets among others. Instead, the reverse mortgage is evaluated based upon available equity in the home. It can be an ideal option for those who are “house rich” but “cash poor.”
As people age and get closer to retirement, it’s common to not have saved up enough for retirement. There is social security income but that’s really not enough to take care of the bills, discretionary income and a mortgage payment, if they still have one. This leaves very little monthly income, so little that if there is a current home loan, they may have trouble making the monthly payments. If there is an existing mortgage and the homeowners take out a reverse mortgage, any existing liens, including the mortgage, are paid off first. That means there are no longer any mortgage payments. Homeowners are still responsible paying property taxes and homeowners insurance and a reverse mortgage lender will want to make sure homeowners have the ability to continue paying property taxes and insuring the property.
The amount of the reverse mortgage is based upon different factors including borrower’s age, current interest rates and property value. If there are two people applying for the reverse mortgage, the younger of the two will be the qualifying age. Funds can be delivered in one lump sum payment, setting up a line of credit or a combination of the two. Once the funds are issued, interest begins to accrue based upon the interest rate on the HECM. Interest continues to accrue until the last borrower on the loan leaves the property. Reverse mortgage loans can only be used with a primary residence.
Homeowners can use the funds for any purpose they wish including paying off debt, taking care of monthly expenses or taking a vacation. There is no limitation regarding what the reverse mortgage funds can be used for. For seniors concerned about how to pay for retirement and they’re sitting on some equity in their home, a reverse mortgage is a relatively simple way to access a portion of their equity without having to pull cash out during a refinance.