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How Does Reverse Mortgage Work?
If you are 62 years or older, own a home and are cash-strapped, you may consider applying for a reverse mortgage to either supplement your income or pay important expenses like healthcare.
This type of loan has become a popular source of cash because it allows homeowners to convert a portion of their home’s equity into cash, without losing ownership of the house, which makes it a great financial planning tool.
Meaning of Reverse Mortgage
So exactly what is reverse mortgage? As its name suggests, it is a special type of loan where the borrower, a homeowner, receives monthly payments from the lender. The concept may be confusing at first because the opposite of what we think when we think of mortgages.
To make the concept easier to understand, think of a credit card. Let’s say you have a maximum credit limit of $10,000 dollars on your card, and you only owe $2,000. This means that you can still ‘borrow’ or use up to $8,000 more for whatever you need before it is maxed out.
If we are using the same numbers for a reverse mortgage, you can assume that you originally took out a loan of $10,000 dollars for your house. Over time, you have paid back $8,000 of that, so you now only owe $2,000 left. If you qualify for a reverse mortgage, you can tell your lender you want a certain amount of money each month deposited into your bank account, and you understand that this will add on to the total amount you owe them.
So if you receive $100 each month, for twelve months, at the end of the year, you will owe $3,200 on your mortgage, instead of only $2,000 when the year started. With a reverse mortgage, you get money now, but the amount you owe overall will increase, like a credit card.
Who does reverse mortgages?
If you’re interested in a reverse mortgage there are many institutions and lenders to choose from. However, it is important to know they don’t all offer the same rates. Always try to compare to find the best lender in your area to make the process quick, easy, and tailored to you. HomeRate Mortgage has years of experience and will work to find the best option according to your needs.
No matter which lender you go with, they will need to make a valuation of your house, to see how much it is worth, how much you owe, and then they will be able to tell you how much you can get with a reverse mortgage based on your home equity.
One good thing about a reverse mortgage loan is that it is not taxable. That means whatever money you get is entirely tax-free, and therefore the loan won’t affect your Medicare or Social Security benefits in any way. The goal of the program is to help the aging population with limited income so that they can manage their necessary expenses, particularly healthcare, not to make it more difficult to qualify.
Types of Reverse Mortgages
As you shop around for a reverse mortgage, take the time to consider which type is the best for you. There are three types:
1) Home Equity Conversion Mortgage (HECM)
This is a type of reverse mortgage that is backed by the Federal Government through the FHA. While it is not a government loan, it is managed, insured, and regulated by the government through the U.S. Department of Housing and Urban Development (HUD) and the FHA.
If you choose to go with this loan, it is important to know that you will be charged an insurance fee of 1.25% per year. The insurance serves two functions:
- It protects the lender from loss in case the loan amount becomes more than the value of the house
- It protects you, the borrower, in case the lender fails to make monthly payments
2) Proprietary reverse mortgages
At times known as ‘Jumbo’ reverse mortgages, proprietary mortgages are loans that are insured by the private companies that offer them, and not the Federal Government. Currently, they have a maximum loan limit of $625,500.
3) Single-purpose reverse mortgages
These are reverse mortgages that can only be used for one purpose (like house repair) which the borrower has to specify when applying. They are usually offered by some not-for-profit organizations as well as state and local governments.
Does Reverse Mortgage Makes Sense?
Yes, it does, but only to a certain group of people. Consider these points:
1) If you are planning to move from your home anytime soon, this loan is probably not for you, because you will have to pay it back when you sell the house.
2) Also, it is important that you are able to keep up with the house’s repairs and improvements. The more the house is worth, the more you’ll be able to receive from a reserve mortgage and the more you’ll be able to sell it for later.
3) Lastly, if you don’t need cash now, this is most likely not a good idea for you. By completing a reserve mortgage, you get cash now but will increase the amount you owe in the long run, plus interest.
Most importantly, do reverse mortgages work?
Yes, they do. With a good lender, the benefits of your reverse mortgage will greatly outweigh the cost of mortgage insurance and appraisal fees.
Who Can Get A Reverse Mortgage?
Here is a summary of the qualifications:
- You must be aged 62 or above
- You must be the owner of the house in question
- The house must be your primary residence
Reverse Mortgage Limit
If the loan you are applying for is backed by the Federal Government, then the maximum amount you can borrow is $625,500. However, the limit is actually determined by a variety of factors, including your age, the value of your home, and the interest rate.
Advantages of Reverse Mortgage
- Borrower retains ownership of the home
- Enables retirees to get money
- You don’t need to make monthly payments
- Improves monthly cash flow
- Proceeds are not taxed
- You can choose the disbursement option (monthly or line of credit)
- Eliminates existing mortgages
- Has competitive rates
Disadvantages of Reverse Mortgage
- Closing costs can be high
- Reduces your house’s equity
Reverse mortgages are not for everyone, but as long as you know when and how they can be beneficial, you can make the decision if the option is right for you. It is important to work with a reliable reverse mortgage broker like HomeRate Mortgage that will be able to answer all your questions and guarantees fast approval, so you start receiving the money you need quickly.