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WHAT IS A REVERSE MORTGAGE?
A reverse mortgage is a way to receive cash from the equity in
your home. Traditionally, you would be required to sell your
home, refinance your mortgage or take out a home equity loan in
order to access your equity.
However, a reverse mortgage allows you to remove equity
(cash) from your home without paying it back for as long as you
live in your home.
You can receive this cash in several ways:
- In one lump sum
- In a monthly payment
- In a credit line which you can withdraw from as needed
- A combination of all three payment options
HOW DOES A REVERSE MORTGAGE WORK?
With a reverse mortgage, your debt grows as you continue to take
money out and interest is added to the balance. This is also
known as a rising debt, falling equity loan. As the amount that
you’re borrowing gets bigger, your equity gets smaller.
Equity is the dollar value of your home that you own. For
example: If you bought your home for $75,000 and it’s now worth
$150,000 – but you still owe $10,000 on your mortgage – your
equity is $140,000.
FORWARD MORTGAGE VS. REVERSE MORTGAGE
Example of traditional forward mortgages:
- You buy your home for $75,000
- Your down payment is $15,000
- Your debt is $60,000
- Over the years you make monthly payments and your debt
decreases as your equity increases
Example of a reverse mortgage:
- Your home is worth $150,000
- You receive a lump sum or monthly payments totaling $120,000
- Your debt is $120,000 plus interest
- Your equity is $30,000 minus interest
- Your debt increases as your equity decreases
However, in an appreciating market, your equity could actually
remain the same or even increase. If you only get one loan
advance, your debt will never change.
WHO CAN QUALIFY FOR A REVERSE MORTGAGE?
You have to be 62 years old (so does co-owner) and you need to
own your home. It needs to be your primary residence at least
six months out of the year. Your income isn’t a factor.
The home must be single family, 2-4 unit building or approved
condominium. Mobile homes usually do not qualify.
HOW MUCH CAN I QUALIFY FOR?
The amount you can qualify for is dependent on your age, the
condition of your home and current interest rates. Older buyers
with nicer homes during times of low interest rates tend to
qualify for the largest amounts.
HOW IS IT PAID BACK?
A reverse mortgage is repaid through the proceeds of the sale of
the home or from other funds if available. If the borrower dies,
the loan must be paid back before the title can be transferred
to the heirs.
HOW MUCH WILL I OWE?
The total amount you will owe depends upon the total amount of
all cash advances and the interest on those cash advances.
However, that amount will never be more than the value of the
home at the time the loan is repaid. No matter how long you live
or how much your home’s value depreciates, you will never owe
more than the actual value of the home.
OTHER COSTS OF A REVERSE MORTGAGE
Out of pocket costs generally consist of the appraisal and
credit check. Other costs are generally financed into the loan.
These financed costs will be tacked onto the balance on which
you will also pay interest. These costs may include (but are not
limited to) closing costs, origination fees, title searches,
inspection fees and insurance.
WHEN IS IT PAID BACK?
The loan must be paid back when:
- You sell the home
- The final surviving borrower dies
- You move away for more than 12 months
- You fall behind on your property taxes
- You let your homeowner’s insurance lapse
- You let the home fall into disrepair
- You rent out your home
- You add another owner to the home’s title
- You change the zoning classification of your home
- You take out another loan using your home as collateral
TYPES OF REVERSE MORTGAGES
The most popular and available mortgage is the HECM (home equity
conversion mortgage). It is insured by the Federal Government.
The FHA tells lenders how much they can loan you as well as
limiting the associated costs of the mortgage. A HECM usually
provides the largest advances and is also usually the lowest
cost reverse mortgage available.
To best determine whether or not a reverse mortgage is for
you, consult with your mortgage professional.
For More Information on this or any other mortgage loan
product, please call one of our Mortgage Loan Specialists or
Apply Online Today!
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