What Is a Reverse Mortgage?
Since the first reverse mortgage was issued in 1961 by a Maine-based bank, reverse mortgages have been available in the United States. In 1987, the U.S. Department of Housing and Urban Development (HUD) was given control over them.
A reverse mortgage operates somewhat differently than a standard mortgage. It permits homeowners who are 62 years of age or older to borrow money with the use of their houses as collateral for the loan. It is often utilized to pay off existing mortgages, support the cost of healthcare, or amplify present income. Once a reverse mortgage is in place, payments is often postponed until after your death, relocation, or property sale.
Homeowners may choose between three different reverse mortgage loan types: proprietary, federally insured, and single-purpose.
- Reverse mortgages use the equity in homeowners’ houses to offer people aged 62 and over with income in the form of a loan.
- Single-purpose, federally insured, and proprietary loans are the three categories of reverse mortgage loans.
- Single-purpose reverse mortgages, which are offered by state, local, and nonprofit agencies, are the cheapest and least common form of reverse mortgages.
- Home equity conversion mortgages (HECMs) are federally insured products that are backed by the U.S. Department of Housing and Urban Development (HUD) and are the most common.
- Proprietary reverse mortgages are used by homeowners whose homes are appraised at values exceeding the HUD limit.
Single-Purpose Reverse Mortgages
State, municipal, and charitable organizations provide a single-purpose reverse mortgage. Because the government and other NGOs are supporting it, it is the least priced reverse mortgage loan choice. As a result, homeowners should anticipate paying less interest and fees with a single-purpose reverse mortgage than with a home equity conversion mortgage (HECM) or a proprietary reverse mortgage.
The least prevalent of the three kinds of loans, this one isn’t offered in every state. Compared to home equity loans, which may be used for any reason, it operates a bit differently. The usage of the profits is limited by lenders that provide just one kind of reverse mortgage. As their name suggests, homeowners are only permitted to use them for a single, pre-approved expense, such as required house repairs or property taxes.
Single-purpose reverse mortgages don’t have to be returned until the house’s ownership changes, the borrower moves to a new permanent residence, or the borrower dies away. Home equity loans and home equity lines of credit (HELOCs) call for monthly installment payments. Additionally, these payments become payable if the borrowers fail to keep up their homeowner’s insurance coverage or if the city condemns the property.
In a single-purpose reverse mortgage, the amount that the homeowner may borrow is lowered by fees, interest, and mortgage insurance.
Home Equity Conversion Mortgages (HECMs)
Home equity conversion mortgages (HECMs) are supported by HUD since they are federally insured. This form of loan has substantial upfront expenses and is probably more costly than a conventional house loan. Because there are no income restrictions or medical conditions, and the loan may be utilized for any purpose, it is the most popular kind of reverse mortgage.
Before applying, counseling is necessary. This makes sure that the homeowner is completely informed of the associated expenses, payment alternatives, and obligations. As long as they are qualified, interested parties are also notified of any government- or nonprofit-issued alternatives. The cost of the counseling session might be covered out of the loan earnings.
Following the counseling appointment, you are informed of the maximum HECM loan amount. The amount you may borrow depends on your age, the value of your property, and the prevailing interest rates. Greater money is given to those who are older and have more equity.
Once the loan has been approved, you have a variety of payment choices to choose from:
- A term option that allots monthly cash advances for a specific time.
- A tenure option that pays monthly advances for as long as the home is your primary residence.
- A credit line that lets you draw from the account at any time, or a combination of this credit line coupled with monthly payments.
If your circumstance ever changes, you may alter your payment choice for a little cost.
Proprietary Reverse Mortgages
Reverse mortgages that are proprietary are guaranteed by private lenders rather than the federal government. They help homeowners who need more money and whose properties are valued greater. This implies that if your home is worth more than the $970,800 loan maximum for federally backed HECMs in 2022, you could be eligible for a private reverse mortgage.
Low mortgage balance borrowers are eligible for more funding. The advantages and expenses of a proprietary loan and a HECM may be compared with counseling, which is sometimes necessary prior to application. You have the same payment options as with the HECM option, either a single payment or a series of equal monthly installments.
Proprietary reverse mortgages do not have upfront or ongoing mortgage insurance costs since they are not federally insured (MIPs).You can possibly borrow more as a result. Whether this makes it superior to a HECM relies on the interest rate charged by the lender and the amount that they are prepared to advance depending on the worth of the property to make up for the absence of mortgage insurance.
If you’re thinking about getting a proprietary reverse mortgage, be sure to look into both. To determine which option offers you the greatest bargain, compare the interest rates and costs charged by several proprietary reverse mortgage lenders and HECM providers. Which one will be the best bargain depends on your age as well as how much your property is worth relative to HECM limitations.
What happens to my reverse mortgage after I die?
After your passing, the reverse mortgage becomes due. Your beneficiaries have three options for paying off the reverse mortgage: using their own money, refinancing the property, or having the lender sell the house to cover the outstanding debt.
What reverse mortgage option is best for me?
If you can locate one, a single-purpose reverse mortgage is the least expensive alternative if you require a specified sum for a particular repair or a tax obligation. Your only choice if you require more than the home equity conversion mortgage (HECM) lending maximum of $970,800 and own a high-value property is a proprietary reverse mortgage. The best alternative for you would be a normal HECM if you didn’t fit any of those requirements.
Can a home with a reverse mortgage go into foreclosure?
Yes. If the owner vacates the house or neglects to keep it in good condition, maintain current homeowners insurance on the property, or pay property taxes, the home with the reverse mortgage may be repossessed. Even if a homeowner vacates the property without their will (for example, to spend a long time in a care facility), the reverse mortgage will become due if they are gone for more than a year. The residence will be foreclosed upon if the owner doesn’t make the payments.
The Bottom Line
Reverse mortgages are financial services intended to use the equity in a property to generate income for homeowners who are 62 years of age or older. When your financial condition changes and your living expenditures rise, they may be useful.
Although reverse mortgages provide several benefits, most notably the ability to give you monthly income without requiring repayment until your death, relocation, or property sale, you should still do your research. Before making a decision, consider the alternatives, such as home equity loans and HELOCs.
But keep in mind that because your property is probably worth a lot (which is one reason to pursue a proprietary reverse mortgage), you may also want to think about if moving to a smaller home will achieve your objectives and leave you with greater equity.
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