Everything You Need to Know About Reverse Mortgages
Reverse mortgages are one of the most complex aspects of real estate lending options, but they can be a viable option for qualified Eastvale home buyers who need money now. Essentially, a reverse mortgage is designed for those who are 62 years of age and older that have equity in a property or home. This option allows homeowners to convert home equity into accessible funds without selling the home.
Typically, this money is utilized for supplemental income, healthcare or for other major expenses. However, a reverse mortgage has potential drawbacks, as it can wipe out home equity and result in fewer assets for yourself and any surviving heirs. Think long and hard before undertaking this complicated process, keeping in mind what you're about to read.
What is a Reverse Mortgage?
In essence, a reverse mortgage is the ‘reverse' of a traditional mortgage. While regular mortgages require homeowners to pay lenders every month, a reverse mortgage is a loan where the lender pays owners. This type of mortgage utilizes the equity in a home and converts it into fiscal payments—kind of like an advance on the home. These funds are typically tax-free and won't affect Medicare or Social Security benefits.
The premise is that homeowners can get the money they need to live well now and still remain in their homes for their lifetime. This is possible because the financial security for lenders lies within the contract. It typically dictates that the loan be repaid in full from proceeds if the home is sold, it no longer serves as a primary residence, or from the homeowner's estate upon their death. Again, one must be aged 62 and beyond to even be considered for a reverse mortgage.
Types of Reverse Mortgages
There are three types of reverse mortgage options for homeowners who qualify, so individuals who think this could be a good way to get funds in their hands should read on.
Single Purpose Reverse Mortgages
Typically offered by non-profits and local and state agencies, single purpose reverse mortgages can only be utilized for a sole purpose, as specified and agreed upon by the lender and borrower. This might be property taxes, a grandchild's education, home repairs, etc.
Proprietary Reverse Mortgages
These are generally backed by a company who actually develops the program, and they are appealing because of the larger loans they tend to offer. Homeowners with higher value homes and small mortgages can get even more money.
Home Equity Conversion Mortgages (HECMs)
By far, HECMs are the most popular option, as they are federally insured and can be used for any reason the homeowner chooses. They are backed by the US Department of Urban Development, but are often more expensive than a traditional home loan.
Because home equity conversion mortgages are so common, we'll discuss those more in-depth below.
What Homeowners Need to Know about HECMs
Home equity conversion mortgages have a few additional required steps compared to other options and can be more costly up front. Before one can even apply for an HECM, they must schedule a meeting with an advisement counselor approved by a government housing agency. Prepare to pay around $125 for this service, which may be payable from the loan proceeds upon approval.
Counselors explain the financial implications of the loan, its actual costs and discuss the regulations and steps for going through the process. They must also talk about alternatives to HECMs such as non-profit and government programs, single-purpose mortgages and proprietary options. While there are no set income requirements, lenders will perform a financial assessment before approving your loan request.
HECM Payment Options
Once approval has been made for a home equity conversion mortgage, borrowers will have a few options concerning how they will repay the loan. These most typically include:
- Single Disbursement Option: Similar to a term option, borrowers receive fixed monthly amounts for the term specified by the contract.
- Tenure Option: This gives borrowers fixed cash advances for the duration of their residency in the home.
- A Line of Credit: Just like a full line of credit, homeowners can draw upon the funds at any time in any amount until the funds are exhausted. One will owe interest on the credit they are using.
- Combination Option: Lenders may agree to a combination option with a line of credit and monthly payments for qualified applicants.
The good news is, that for a small fee, some lenders may allow homeowners to change their payment option should the need arise.
Those who proceed with a reverse mortgage of any type should be aware that there is typically a right to cancellation within three business days of the transaction agreement. Be sure to seek out advise from an independent party or a real estate agent if you have concerns about the implications and challenges of reverse mortgages.