Everyone knows what a mortgage is, but not everyone knows how a reverse mortgage works. A reverse mortgage is a loan taken against the equity of a home. It is a very specialized type of loan that is not the best fit for everyone. Reverse mortgages are reserved for homeowners that are 55 and older. The homeowner and lender will agree on an amount for the reverse mortgage, and this loan will have no monthly payments. The loan will be paid as a lump sum when the homeowner sells the home or passes away. Reverse mortgages are commonly reserved for homeowners hoping to supplement their retirement income because their largest asset is their home.
Should You Get a Reverse Mortgage?
As stated above, a reverse mortgage is built for a very specific group of people. Understanding what you are looking for, what getting a reverse mortgage means, and possibly exploring other loan options is a great way to determine if a reverse mortgage is right for you. Here are some helpful things to note about a reverse mortgage:
What Type of Loan Is It?
Reverse mortgages act like typical loans because the reverse mortgage also requires a lender. Most reverse mortgages are done through the Home Equity Conversion Mortgage (HECM), insured by the Federal Housing Administration. Many factors will go into how large of a loan you can be given but are predominantly affected by your age, home value, and how much equity you have in the home.
In 2022, the FHA raised the reverse mortgage limits to $970,800. This is the maximum a lender can estimate your home value as the national HUD HECM limit. There are rarely any reverse mortgages that high because reverse mortgages are generally less than 80% of a home’s value. To qualify for the maximum loan, you would have to be an ideal candidate with a home valued upwards of $1.028 million. Lenders will often offer a larger loan the older you are and if you have considerable equity in your home.
Reverse Mortgages are Reserved for a Primary Residence
Reverse mortgages can only be done on a primary residence. Reverse mortgages cannot be taken out on investment or vacation homes. This means that the homeowner must live more than six months out of the year at this home.
You Are Still Responsible for Other Home Fees
Taking a reverse mortgage out does not mean you are no longer responsible for your home. Fees associated with owning a home, such as a homeowner’s insurance and property tax, still need to be paid. If your lender believes you will run into financial issues in the future, they may take it upon themselves to reserve a part of the reverse mortgage for paying these fees.
There Are Options for Payments
You have options when it comes to receiving your payment. The four primary ways are:
Lump-Sum: Choosing this option means that you want to receive the payment upfront. You will receive slightly more than half of the sum when the loan is approved and the remainder in twelve months following the first payment. This method also allows for a fixed rate if you forgo the second half of the loan.
Tenure Payment: This option will provide you with monthly payments that have been agreed upon by you and your lender indefinitely. This type of plan generally ends when you leave home or pass away. It has an adjustable interest rate.
Term Payment: This option also has an adjustable interest rate, but payments are typically larger than the tenure payment. An agreed-upon amount of monthly payment AND time frame is discussed.
Credit line: This option is similar to a credit card, and you can draw on the loan as needed; and this method also uses an adjustable interest rate.
You also have the option to mix and match the above options.
High Age Requirement
Unlike most loans, a reverse mortgage has a high minimum age requirement. Up until 2021, homeowners had to be 62 to receive a reverse mortgage loan, and the age was recently changed to 55. Since reverse mortgage loans are reserved for older homeowners who would like to stay in their homes, it is not a viable loan option for younger people.
Should You Get a Reverse Mortgage?
The information above is far from sufficient to help you make this choice, but it can help you decide if you should consider it. Calling a lender or financial institution may be the best course of action if this article has piqued your interest.
