Although many view their retirement as the “Holy Grail” of senior living, without a regular paycheck coming in, homeowners may soon find that balancing their finances can become a challenge. A reverse mortgage can help homeowners aged 62 or older leverage their home equity and turn it into cash that can be spent on a variety of expenses. By taking advantage of reverse mortgages when applicable, individuals can get the much needed funds to buy a new home, support living expenses, help children plan for college and consolidate debt.
What is a Reverse Mortgage?
A reverse mortgage is a type of mortgage loan secured against residential property and its value. Homeowners can borrow against their home’s equity without having to make monthly payments like a typical mortgage. Interest will accrue as it does with any loan; however, the final repayment of the reverse mortgage is only due when the borrower has vacated the home permanently.
How Does a Reverse Mortgage work?
Although reverse mortgages are still a form of personal loan, the way they are managed is the opposite of traditional formats. When you pay off conventional loans, the amount you owe is reduced and your equity increases over time. On a reverse mortgage, you draw out the equity in your property earlier than normal and your interest and balance accrues over time. With a reverse mortgage, there are no prepayment penalties and the borrower isn’t required to pay back the balance at any specific date. Funds acquired from the reverse mortgage are tax-free and have no restrictions on how they’re used.
Who is Eligible for a Reverse Mortgage?
To apply for a reverse mortgage, you need to meet specific criteria outlined by the Federal Housing Administration (FHA). Eligibility requirements for applications are as follows: You must be at least 62 years old; own your home or have built up equity in your property; have no delinquent debts; pay all property taxes, insurance and maintenance fees; and you and/or an eligible spouse must live on the property as a primary residence.
Types of Reverse Mortgages
If you’re considering applying for a reverse mortgage, you’ll have a few options to choose from. There are currently three types of reverse mortgages you can apply for: single-purpose, proprietary and Home Equity Conversion Mortgages (HECMSs).
Single-purpose reverse mortgages are one of the most common and affordable options to choose from. These types of loans can only be used for one purpose that is specified at the time of application.
Proprietary reverse mortgages are less conventional than both single-purpose and HECM options since they are not federally insured. However, proprietary reverse mortgages are still a good option as they allow lenders to establish their own terms and do not require up front or monthly mortgage insurance premiums. Proprietary reverse mortgages are typically used for more substantial advances in homes with higher appraised values.
Home Equity Conversion Mortgages (HECMs)
Home Equity Conversion Mortgages (HECMs) are federally insured reverse mortgages with no income limitations or medical requirements. HECMs can also be used for any reason once the loan is established. Before you can apply for an HECM loan, however, counseling is required in order to explain the full costs associated with the loan.
Banks that offer Reverse Mortgages
When deciding on what type of reverse mortgage to apply for, homeowners have several private financial institutions they can choose from. Here are some of the most popular banks to work with when applying for a single-purpose, proprietary or HECM reverse mortgage loan.
Finance of America Reverse
Finance of America Reverse is the second largest national reverse mortgage lender. The bank is currently one of only a few that offer proprietary reverse mortgages for homeowners whose property values exceed HUD limits. The bank operates out of 43 states and is a member of NRMLA (National Reverse Mortgage Lenders Association).
American Advisors Group (AAG)
AAG is another large nationwide home equity loan provider that offers several reverse mortgage options. AAG is a popular choice for anyone needing an HECM loan, since they have more experience offering and supporting these solutions than other lenders. The company is also listed as an “approved lender” by the U.S. Department of Housing and Urban Development (HUD).
Liberty Home Equity Solutions, Inc.
Liberty Home Equity Solutions was founded in 2004 and offers reverse mortgages in every U.S. state except Utah. The company has funded more than $7.5 billion in loans to date and has over 1,000 business partners nationwide.
Pros and Cons of a Reverse Mortgage
When deciding on whether or not a reverse mortgage is right for you, there are a few pros and cons that should be considered.
Money received from reverse mortgages is tax-free. Since a reverse mortgage is considered a loan, homeowners are not obligated to pay anything additional to the U.S. government. Another great benefit is that homeowners can create a steady stream of income by leveraging their home’s equity. This gives significant financial freedom to newly retired individuals or those looking to renovate their homes for future sales.
Reverse mortgages can be a poor choice for individuals who aren’t good at maintaining their debts. While many people enjoy the freedom of not having to be held accountable for interest payments each month, the debt can quickly escalate and lead to foreclosures in worst case scenarios. Another thing to consider is that reverse mortgages may not always be the best loan solution. Depending on the available options, fees may be higher for a reverse mortgage than a traditional loan and may not be the best financial decision based on your unique situation.
Factors to Consider Before Getting a Reverse Mortgage
Before deciding on applying for a reverse mortgage, there are a few things that you should consider.
First off, some reverse mortgages can cost thousands of dollars in fees and homeowners should weigh all of these before moving forward with a decision. These fees may depend on several variables, including your credit history, monthly income and financial obligations.
The Consumer Financial Protection Bureau also recommends that anyone interested in a reverse mortgage should seek counseling and ensure it’s the right decision to make. Many times, homeowners jump on the idea of a reverse mortgage too quickly and find themselves fighting to keep up with accruing interest payments.
If you do decide to apply for a reverse mortgage, you should plan on staying in residence long term. If you decide to move shortly after you receive a reverse mortgage loan, you’ll need to repay the mortgage in full. Depending on the loan size and your home’s current appraised value, this can lead to a deficit and cost much more than you had initially anticipated.
Alternatives to a Reverse Mortgage
There are many other alternatives to reverse mortgages that you can consider, including mortgage refinancing and home equity loans.
Rather than applying for a new loan, you can look into refinancing the current loan you already have. This can lower your monthly payments and increase your cash flow. It can also help you to build equity in your home faster and allow you to maintain your property assets. If you choose to refinance your mortgage, however, you will need to pay most of the same closing costs you did when you first bought the property.
Home Equity Loans
Home equity loans, also known as a second mortgage, is another way homeowners can borrow money while leverage their home’s equity. Home equity loans are given in a lump sum and can be used for virtually anything, including credit card debt, student loans and home renovations. You can also take tax deductions on up to $1 million of any mortgage debt you currently have. Something to consider about home equity loans is that they typically have higher interest rates than other investments. It’s important to review all of the costs and fees associated with these loans as they can add up quickly.
The Final Word
Reverse mortgages are a great way to leverage your home’s equity once you’ve reached retirement age and are a popular solution for individuals looking to manage their regular financial obligations once they’re older. However, while reverse mortgages may work for many individuals, they may not be for everyone. Interest rates can accrue quickly with this loan format, and it’s highly recommended that homeowners review all of their options and meet with a financial counselor to see if a reverse mortgage is the best choice.