Even if you have a plan for your finances, unexpected events can still ruin all of your plans. It is understandable that the future worries you, even though it feels like the end of the world every other Tuesday. (Just stop watching the news.) In order to stop fretting over the possibility of being broke tomorrow, you can start planning for your finances. (Think less of a Plan A, and more of a Plan G.)
Reverse mortgages are suitable options that hold lots of potential for you to be able to make a little extra on a monthly basis. You will be able to gain additional money each month, improve your quality of life, and even provide some financial security for qualifying seniors. (No, financial security is not a unicorn; it is just a well-planned out horse.)
What is Reverse Mortgage?
In order to better understand how a reverse mortgage could help your situation, first you should understand what they are. Simply put, according to Investopedia, a reverse mortgage is a loan that allows its borrowers to “receive funds as a lump sum, fixed monthly payment or line of credit.” Not only can a reverse mortgage provide extra funds, but it is different from a traditional loan because the homeowner does not need to make any payments! (It sounds too good to be true, but it really exists.)
You can consider a reverse mortgage, for all intents and purposes, a loan. Any homeowner who meets the criteria has home equity that can borrow funds against the value of their housing unit, receiving the funds in different ways. You can receive it all at once, as fixed payments per month, or as a line of credit. (Think of a forward mortgage, and switch up the process.) (Fontinelle)
How Does Reverse Mortgage Work?
With a regular mortgage, you pay the lender each month to purchase your home over a period of time. With a reverse mortgage, on the other hand, you get a loan from the lender who pays you. (Think of it as an advance payment of your home equity, pretty neat.) (Federal Trade Commission)
Typically, you do not need to pay back the money for as long as you reside in your home. There are unfortunate cases that you may pass away, sell your home, or move out. In that case, you, your spouse, or your estate will need to repay the loan. (No, it is not free money. Now, that is a unicorn.)
If you receive a reverse mortgage of any kind, you will be getting a loan that you borrow against your home equity. However, there are certain aspects and costs that you should consider, if you are thinking of a reverse mortgage. (Hold your horses and don’t just jump the gun.)
Top 3 Things to Consider with a Reverse Mortgage
The first thing you should consider is that there are fees and costs that follow reverse mortgages. Lenders will charge an origination fee and other costs, along with servicing fees throughout the duration of the mortgage. There are some lenders who will also charge you with mortgage insurance premiums, which is mostly for federally-insured HECMs. (You need to pay money to make money, and reverse mortgages are not an exception.)
The second thing to consider is that in the larger scheme of things, you will owe more money over time. The money that you receive through your reverse mortgage will include interest, which means that there is added interest to the balance you owe every month.
The third thing to consider about reverse mortgages is interest rates. Interest rates can vary significantly over time. You will find that most reverse mortgages have flexible rates, which are linked to a financial index and any change that may take place in the market. Variable rate loans have the tendency to provide you with more options on how to receive your money through reverse mortgages. (Interest rates are the enemy; let’s just keep it at that.)
Other Reverse Mortgage Considerations
The fourth thing to consider is that you will need to pay for other costs that are relevant to your home. In a reverse mortgage, you keep the title to your home. By keeping the title to your home, you are in charge of property taxes, insurance, utilities, maintenance, and other expenses. If you do not uphold your financial responsibilities to your home, then the lender may possibly require you to repay your loan. (Despite everything, you are still responsible for your home, you know?)
The fifth and final thing (it’s the last one, honest!) to consider with reverse mortgages is that interest is not tax deductible each year. Any interest on reverse mortgages will not be deductible on income tax returns, only until you fully pay off or partially pay off the loan.
Types of Reverse Mortgage
With reverse mortgages, there are three types of reverse mortgages, which are: single-purpose reverse mortgages, proprietary reverse mortgages, and federally-insured reverse mortgages (HECMs). To put it in simple terms, some state and local governmental agencies offer single-purpose reverse mortgages. Proprietary reverse mortgages are private loans, and Home Equity Conversion Mortgages (HECMs) are federally-insured mortgages. The Department of Housing and Urban Development (HUD) backs Home Equity Conversion Mortgages (HECMs)..
Each type of reverse mortgage has a different type of process and criteria. In order to decide which one you want, you should research the different options and find out what applies to you best. (Don’t just say yes, the internet is free.)
Single-Purpose Reverse Mortgages
With single purpose reverse mortgages, you will find that they are the least expensive option. Some state and local governmental agencies (the nice kind), as well as non-profit organizations, provide these reverse mortgages. However, they are not available everywhere, so be careful. The lender specifies a single purpose that you can use the single purpose reverse mortgages for.
As an example, the lender might state that borrowers can only use it to pay for home repairs, improvements, or property taxes. (If you need a serious remodel right this second, this reverse mortgage is a blessing.)
Most homeowners who obtain a low or moderate income can qualify for single purpose reverse mortgages.
Proprietary Reverse Mortgages
Companies that developed your home can provide proprietary reverse mortgages, which you can consider as private loans. If you own a high-valued home and have a small mortgage, you might be able to obtain a bigger loan advance from a proprietary reverse mortgage. (Those six bedrooms and five bathrooms come in handy now.)
Since proprietary reverse mortgages are not federally insured, these reverse mortgages do not have up-front or monthly mortgage insurance premiums (MIPs). This means that you, as a borrower, are likely able to borrow more funds. Even though you will not need to pay anything on a Home Equity Conversion Mortgage until the time is due, the monthly premium reduces the amount you can borrow. (Ten Points for Proprietary Reverse Mortgages!)
Home Equity Conversion Mortgages (HECMs)
As for Home Equity Conversion Mortgages (HECMs), these reverse mortgages are federally-insured mortgages that are supported by the U.S. Department of Housing and Urban Development (HUD). Home Equity Conversion Mortgages (HECMs) loans can be used for any purpose of homeowners. (Wherever your imagination takes, the Department of Housing and Urban Development thought of it first.)
Home Equity Conversion Mortgages (HECMs) loans and proprietary reverse mortgages are considered more expensive than traditional home loans, and you may find the upfront fees quite costly. (This is very important if you plan to move to Argentina any time soon and leave everything behind.)
If you are planning on borrowing with a proprietary reverse mortgage or Home Equity Conversion Mortgages (HECMs) loan, then the following aspects will tell you how much you can borrow:
- Your age
- The type of reverse mortgage you select
- The appraised value of your home
- Current interest rates, and
- A financial assessment of your willingness and ability to pay property taxes and homeowner’s insurance.
How to Apply for a Reverse Mortgage?
While this is an incredibly helpful option for homeowners, not everyone is eligible. Only those who are at least 62 years old, and close to paying off their home/paid off their home are eligible. You also will not be eligible if your mortgage is on a rental property.
When properly used, a reverse mortgage will be able to provide seniors more time for their retirement assets to grow which helps with delaying pension and social security payouts. According to Reverse.org, if you are interested in this housing option then you will want to meet these basic requirements:
The youngest borrower is at least 62 years old
The home is the primary residence
The borrower(s) have enough home equity
The borrower(s) meet the financial eligibility criteria set by the Department of Housing and Urban Development.
The Federal Housing Administration (FHA) will be able to determine the available amount of home equity that the borrower can used based on factors like:
Current property value
Current Mortgage loan balance
Age of the youngest borrower
How To Receive Your Reverse Mortgage Payment
Of course, you are thinking about how you can receive your payment from the reverse mortgage. Well, you can receive it one of six ways. It all depends on you and what you prefer. (However, a duffel bag with a dollar sign or a diamond the size of Texas is not one of them.)
Lump Sum: You can receive all of the proceeds at once, but only when your loan closes. This is considered the only option that comes with a fixed interest rate. (Bad interest rate, but hey, think of the pot of gold.)
Equal Monthly Payments: For the duration of time that the borrower lives in the home as a primary residence, then the lender will make steady and stable payments to the borrower. (You can also refer to this as a tenure plan.)
Term Payments: The lender would give the borrower equal monthly payments for a set period of time, which is based on the borrower’s choosing.
Line of Credit: The funds would be available for the homeowner to borrow whenever needed. However, the homeowner will only be required to pay interest on the amounts that are actually borrowed from the credit line. (You won’t get stuck paying interest for all of it, thankfully.)
Equal Monthly Payments + A Line of Credit: The lender offers steady monthly payments for as long as the borrower resides in the home as a primary residence. If the borrower needs more funds at any point, then the borrower can access the line of credit. (The best of both worlds, right?)
Term Monthly Payments + A Line of Credit: The lender offers steady payments per month to the borrower for a set period of time, based on the borrower’s choosing. Additionally, if the borrower needs more money during or even after that term, the borrower can access a line of credit. (Also, the best of both worlds.)
There is a possibility that you can use a reverse mortgage called a “HECM for purchase.” You can use this type of reverse mortgage if you are planning to purchase a different home than the one you are currently residing in.
If your plan is to remain in your current residence, and you meet the criteria listed above, then a reverse mortgage could be a great tool for you to improve your situation. Make sure to consider a reverse mortgage when reviewing ways to get some extra money!
You can choose between a single-purpose reverse mortgage, proprietary reverse mortgage, and a Home Equity Conversion Mortgage (HECM) loan. Some state and local governmental agencies (the nice kind), as well as non-profit organizations, provide these reverse mortgages for a single purpose. Proprietary reverse mortgages are private loans from the companies that developed your home. Finally, the Department of Housing and Urban Development (HUD) created Home Equity Conversion Mortgages, are federally-insured mortgages that you can use for any purpose. This all depends on the financial situation you are in and what you are looking for in a reverse mortgage.
Federal Trade Commission. Consumer Information: Reverse Mortgages . 06 2015. 18 06 2021 <https://www.consumer.ftc.gov/articles/0192-reverse-mortgages#types>.
Fontinelle, Amy. Reverse Mortgage. 31 05 2021. 18 06 2021 <https://www.investopedia.com/mortgage/reverse-mortgage/#what-is-a-reverse-mortgage>.