Retirement is a time many adults look forward to, but a time dread when it is fast approaching. This is due in large part to financial stability. About 50 percent of older adults fear not having enough money saved for retirement. Another 25 percent fear they will never pay off their existing debt.
Fortunately, there is a lifeline for older homeowners. A Reverse Mortgage allows older citizens to afford the retirement lifestyle they want and helps them fund their basic needs and home maintenance.
What is a reverse mortgage?
A reverse mortgage loan is similar to a traditional mortgage because the home is used as collateral. However, it does not work like a forward mortgage — a loan used to buy a home — and does not require a monthly mortgage payment.
The loan is only accessible to older adults at least 62 years old. It is only due for repayment when the borrower is no longer living in the home — in the case of death or being moved to a nursing home.
Meanwhile, interest and fees are added to the monthly loan balance, which grows over the loan term. The loan might be with or without limitation on what you can do with it. You can successfully fund your retirement lifestyle with it or even invest in a venture of your choice if the loan agreement permits.
Homeowners must also pay property taxes and homeowners insurance to retain the loan validity. Any action otherwise can invalidate the loan clause and make the lender demand repayment even when the borrower is still alive and living in the home.
How reverse mortgage work
Homeowners who are 62 or older and have considerable home equity (usually 50 percent) can borrow against the value of their home. Here is how it works:
- The homeowner works with a reverse mortgage counselor to find a lender and a program
- The homeowner picks a preferred loan program and apply
- The lender may conduct a credit check and reviews the property, including title and appraised value
- If approved, the lender disburses funds for the loan as a lump sum, line of credit, or periodic annuity payments, depending on the homeowner’s choice.
- The loan is repaid when the borrower dies or moves out of the loan. In such case, the heirs will either repay the loan or the lender will sell the home and remit any excess to the homeowner or heirs.
A reverse mortgage applicant must be at least 62 years old.
Homes built on or after June 15, 1976, can be used as collateral for reverse mortgage loans. Cooperative housing owners are not eligible.
The loan applicant must have considerable equity in the home.
The U.S. Department of Housing and Urban Development (HUD) mandates seniors interested in reverse mortgages complete a HUD-approved counseling session. The session educates the prospective borrower on the benefits and risks of taking a reverse mortgage based on their financial and personal circumstances.
Homeowners are expected to pay property taxes and insurance once the lender disburses the requested fund. The lender may request repayment if there is any default.
Types of reverse mortgage
There are three types of reverse mortgages:
Single-purpose Reverse Mortgage
These loans are provided by nonprofits, state, and local governments. They come with restrictions on what you can do with the fund, such as for repairs or improvements.
Home Equity Conversion Mortgage
Home Equity Conversion Mortgages (HECMs) are backed by the HUD. They do not come with restrictions on the use of funds.
Proprietary Reverse Mortgage
Proprietary reverse mortgages are offered by private lenders. The lender sets their eligibility criteria, rates, fees, and terms. They are considered the easiest to get considering there are lots of available lenders.
Things to consider before taking a reverse mortgage
It’s not interest-free
A reverse mortgage is not an interest-free loan. The interest can be fixed or adjustable depending on the lender. For instance, as of June 20, 2023, the fixed rate for a reverse mortgage loan with a lending limit of $1,089,300 was about 6.680% for a fixed rate and 7.035% for an adjustable rate.
Home Equity Reverse Mortgage Rate.
Better to inform your heirs and/or partner
If you stay with your spouse, informing them when you are considering a reverse mortgage is better. Likewise, if you have heirs looking forward to inheriting the home, discuss your plan with them.
This will prevent them from the shock of learning about this afterward. The lender, upon your death, will try to sell the home to recover their loan, except your heirs repay it from their pocket.
Right of rescission
For most reverse mortgage agreements, you have three business days after the loan approval to cancel the deal without incurring any penalty. This is known as your right of “rescission.”