What Is a Reverse Mortgage?
What Is a Jumbo Reverse Mortgage and How Is It Different?
Reserved for Americans age 55 and older, a Home Equity Conversion Mortgage (HECM) is a type of reverse mortgage insured by the Federal Housing Administration (FHA). A HECM is a type of loan that allows homeowners to tap into their home’s equity and convert it into cash, whether through a lump-sum payment, regular monthly payments, a line of credit, or a combination of the above. The money can be used for any purpose, which allows retirees to live free of financial worry.
Reverse mortgages are FHA insured up to a limit, for 2021, of $822,375. For people who live in states with very high real estate prices, a jumbo reverse mortgage can help you unlock equity up to $4,000,000. Jumbo reverse mortgages are not FHA insured. The minimum reverse mortgage age is 62; every borrower on the loan must be at least this age. You are not required to make payments on your reverse mortgage, but you do have to continue to pay all required property taxes, homeowners insurance, and HOA fees due.
How Does a Reverse Mortgage Work?
Knowing the reverse mortgage facts will help you make a wise decision about using the equity in your home. A reverse mortgage works similarly to a refinance of your existing mortgage. During the funding of your reverse mortgage, your existing mortgage, if you have one, is paid off, and the remaining funds are paid to you as the borrower. The maximum amount you can fund is based on your age and the total value of the loan. Typically, reverse mortgages can pay a percentage of your home equity value, up to the FHA limit.
The minimum reverse mortgage age is 55 for all borrowers, but there are protections for younger spouses of borrowers. These protections prevent the loan from coming due upon the death of the older borrower.
When you take a reverse mortgage, you usually don’t have to make any mortgage payments. As long as you continue to pay all required property taxes, homeowners insurance premiums, and HOA dues, you will keep 100% ownership of your house, and you can stay in it as long as you like. If you pass away with an outstanding balance on your loan, your heirs will have an opportunity to sell the home and keep any amount above the loan balance. One of the great benefits of a reverse mortgage is that your heirs are never responsible for any shortfall; if for some reason your home sells for less than the reverse mortgage, they do not have to pay off the difference.
Reverse Mortgage Pros and Cons
A reverse mortgage is a powerful financial tool, but it isn’t for everybody. When weighing the pros and cons of a reverse mortgage, keep in mind that there’s a lot of misinformation and minconceptions about reverse mortgages. That said, it’s important that you base your decision on facts, not opinions or anecdotes.
The main pro of a reverse mortgage is that you can eliminate your mortgage payment, which frees up cash every month. In addition, you’ll be able to tap into your home’s equity to further increase your monthly income, allowing you even more financial freedom. You keep 100% ownership of your home. You also have the right to refinance your reverse mortgage if you want to. You can choose to pay off your reverse mortgage, with no prepayment penalty.
The most notable con of a reverse mortgage is that your heirs will have to repay the loan when you pass away. They will have 30 days to either pay off the reverse mortgage, or sell the house. It may be possible to extend this deadline. In essence, you are consuming the equity in your home, so when your heirs sell your home at your passing, they will receive a smaller inheritance.
You also have to pay attention to fees, most of which are paid up front and are added onto the reverse mortgage balance. Another con is that any interest you pay on a reverse mortgage can’t be deducted on your taxes like a regular home loan, although you can deduct the total interest paid if you pay the loan off in full.
How much of my home equity can I access?
The total amount you can fund depends on the appraised value of your home, how much, if any, you owe on your first and second mortgages, and your age. To find out more, please download our free information kit, or give us a call.
Reverse Mortgage Requirements
Among the most important reverse mortgage facts for planning your retirement are the requirements for receiving one. There are basic, program-wide rules as well as lender or bank-specific requirements.
For starters, there are age requirements. The minimum reverse mortgage age is 55. This age requirement applies only to the official borrowers on the loan, so having a spouse younger than 55 may not be a problem.
You must live in the home you’re taking the reverse mortgage on, and it must be your primary residence. You must own the home and have at least 50% equity in the home. You must also meet with a Department of Housing and Urban Development (HUD) reverse mortgage counselor before you can receive one of these loans. The purpose of this meeting is to make sure you understand how the loan works and to confirm that it’s a good fit for you.
Besides these program-wide requirements, there are various other requirements that may differ from bank to bank, but you can expect to need an appraisal, complete an application, and provide various documentation. However, these loans are easier to qualify for than traditional mortgages, so having good credit is not as important as having the minimum required equity in your home.
Can a Reverse Mortgage Be Refinanced?
Reverse mortgages can be refinanced, just like traditional mortgages. The refinance is a transaction that replaces the old reverse mortgage with a new one. The refinanced loan will have different terms, which may include:
- A different interest rate
- Different payout terms or schedule
One specific requirement of a reverse mortgage refinance is that you must have had the existing loan for at least 18 months. Besides this, the usual reverse mortgage requirements apply to your refinance. The property must be a single unit that you own, and you must continue to live in it as your primary residence.
Refinancing a reverse mortgage might make sense if you can lower the interest rate, or move to a fixed rate from a variable rate. Another reason people refinance a reverse mortgage is to add a younger spouse. If your spouse didn’t meet the reverse mortgage age requirements when you first obtained the loan, but they’re now old enough, you can add them to the loan as part of a refinance.
Of course, another reason to refinance would be to cash in equity that’s built up since you first took out your reverse mortgage. This could be especially true in today’s real estate market. Refinancing an old reverse mortgage could unlock tens or hundreds of thousands of dollars in new equity, and give you even more cash flow for your retirement.
Reverse Mortgage Facts
Will I still own my home with a reverse mortgage?
Is there any risk of losing my home?
What does HECM stand for?
What is the application process like?
Do I have to pay off my second mortgage?
Is there negative amortization?
My credit is bad; does that matter?
How much of my home equity can I access?
Free Reverse Mortgage Fact Kit
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