What is a Reverse Mortgage?
Your home is one of your most valuable assets, and if you need additional financial resources in retirement, you can use it to generate the cash you need. How? Through a reverse mortgage.
A reverse mortgage lets you turn your home’s equity into cash without incurring additional monthly payments or needing to sell your house. In order to qualify for this loan, you need to meet the following requirements:
- You must be at least 62 years old.
- You must have ownership of the home.
- You must live in the home and make it as your primary residence for the duration of the loan.
- You must keep upon your property taxes, home insurance, and condominium fees (if applicable).
- You must maintain your home in accordance to FHA guidelines.
- You need to meet with a designated counselor who will discuss what reverse mortgage is all about.
Getting a reverse mortgage does not entail making monthly payments – in fact, you’re not generally required to pay back the loan for as long as you live in your home. The loan will only be payable when you sell your home, when you change your primary residence, or when you pass away.
How Much can you Get from a Reverse Mortgage Loan
It depends. The loan amount will be calculated based on your age and the value of your home. More so, a reverse mortgage is structured in a way that the total loan amount including the interest will not be more than the value of the home.
How to Receive the Loan Amount from Reverse Mortgage
This loan product was created with the aim of providing retirees with limited income a way to use the accumulated value in their home. It’s termed “reverse” mortgage since in “regular” mortgages, you give monthly payments to a lender, but in a reverse mortgage, the lender gives you the money instead.
You have the option to receive the loan amount through a lump-sum payment or through monthly checks issued by the lender. In some cases, the lender can give the money to you through a combination of both.
Depending on the type of reverse mortgage, the funds you receive from the loan can be used any way you like – to pay for health care, to supplement your income in retirement or even to pay off your current mortgage. Reverse mortgage proceeds are typically tax-free, and most have no restrictions on income.
Types of Reverse Mortgage
There are three main types of reverse mortgage. These are:
- Single-purpose Reverse Mortgage
This is the least expensive out of all the types. It is offered by the state, local government or non-profit agencies. In this type of reverse mortgage, the lender will specify the purpose of the loan and how it will be used.
- Home Equity Conversion Mortgage (HECM)
HECM is regulated by HUD, insured by the Federal Housing Administration, and backed by the Department of Housing and Urban Development. It typically costs more, but this loan can be used for any purpose and has no income limitations and medical restrictions. Majority of reverse mortgages in the United States are HECMs.
- Proprietary Reverse Mortgage
This type of revere mortgage loan is insured by the private companies that offer them. Proprietary reverse mortgage loans are not mandated to have the same rules as that of HECMs, but generally, they are structured with the same policies that protect consumers. Typically, this type of loan is taken on homes that have higher values.
Learn more about the different types of reverse mortgage here.
Is it for you?
Experts say that taking a reverse mortgage is advisable for individuals who are planning to spend their retirement in their homes. Likewise, it may also be a good move for those who need to supplement their income in retirement and have limited assets apart from their homes.
Meanwhile, reverse mortgage may not be for individuals who are not willing to take the risks involved in taking a reverse mortgage such as not being able to leave the home to your children. More so, it’s not advisable for retirees who plan to relocate or travel later on in life.
Ultimately, it all boils down to your needs and goals. In order to make the best decision, make sure that you have a clear picture of what these are as you decide whether to take a reverse mortgage or not.
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