Reverse mortgages allow homeowners over the age of 62 to borrow money from their equity. This can be in the form of a line or lump sum payment, a line or credit card, or cash. It does not require repayment, unlike standard mortgage loans, until the borrower moves out of the home. However, reverse mortgage borrowers still have to pay real estate taxes, homeowners' insurance, flood insurance, and association dues.

Reverse mortgages can be used to supplement your retirement income if you plan well. If you have the cash to pay the difference between the reverse mortgage loan proceeds and the purchase price for the property, reverse mortgages can also be used to buy a house.

Who Offers Reverse Mortgage Loans?

The Federal Housing Administration (FHA), which is also known as the Home Equity Conversion Mortgage program, has been the main source of reverse mortgages. A HECM is the only reverse loan that the federal government guarantees. Therefore, HECMs can only be obtained through an FHA-approved lender.

Non-HECM reverse mortgages can be obtained from banks, credit unions, and other lenders. Non-HECM lenders offer reverse mortgage loans up to twice the amount of HECM lenders. However, they are also more costly than HECM loans and not insured by the federal government.

Reverse Mortgage Eligibility

Eligible homeowners are those who have paid off their home loans or have a small balance. Reverse mortgages are often done after retirement to supplement the borrower's income. The HUD must also approve the property, and the borrower must reside in the house. You can apply for eligibility for single-family homes, 1-1-4 unit properties, and some condos, as well as manufactured homes.

What Is A Reverse Mortgage?

Reverse mortgages are similar to annuities in that they are based on life expectancy. These factors affect the maximum amount you can receive from a reverse mortgage loan.

• Age of the youngest borrower

• The home equity is a smaller percentage of the property's value or the county maximum limit of $679,650

• Current interest rate

The more equity a borrower has, the older they are. Therefore, the loan amount will be increased if the interest rate is lower. After determining the amount, you can choose your payment method from the following options.

• Lump-sum Cash Payout:

  One Proceeds Payment at Closing

• Line of credit:

  Funds can be drawn from a line credit when they are needed

• Term:

  A fixed number of payments over a set period of time

• Tenure:

  Equal monthly payments are made if at least one borrower occupies the property

• Modified term:

  Combination of a line credit and a fixed amount of payments for a fixed period

• Modified tenure:

  Combination of a line credit and monthly repayments for as long as at least one borrower occupies the residence.

Consumer Finance Protection encourages borrowers to choose the monthly payment option or the line of credit options over the lump sum cash payout. The line of credit options offers more security in retirement. Non-HECM reverse mortgages typically offer fewer income options.

The property must be sold or disposed of as a primary residence. Any cash received through a line credit, payment, interest, or other HECM finance charges must also be repaid. Your spouse or estate will receive all proceeds above the amount owed. Any equity that remains can be passed on to your heirs. The estate and heirs do not receive any debt.

What Are The Costs Associated With A Reverse Mortgage?

Lenders will charge different amounts for reverse mortgage loans. The actual cost depends on your income options. The main costs are:

• Origination Fee:

  This fee is paid to the lender in order to originate the loan for your property. The FHA caps this amount, although they can vary from lender to lender. The origination fee for homes less than $125,000 is $2,500. The origination fee is $2,500 for homes worth more than $125,000.

• Third-party closing fees:

  These fees can also vary from lender to lender. They include appraisal fees and credit checks.

• Mortgage insurance:

  Reverse mortgages will require you to pay a premium for mortgage insurance (MIP) at closing and a monthly MIP over the life of your loan at 1.25%.

• Interest Rates:

  Reverse mortgage loan interest rates are almost always adjustable. This means that your reverse mortgage loan rate will fluctuate monthly or annually, depending on which type you select.

• Servicing Fee:

  This fee covers the cost of servicing your loan. Today, servicing fees are much less common than in the past.

Compare the costs of reverse mortgage loans to determine which one is best for you. These numbers can be found by looking at the annual loan costs of each lender.

What Are The Advantages And Disadvantages Of This Program?

Advantages

• Borrowers can stay in their homes as long as they're physically able after retirement.

• Reverse mortgage loans can be used to supplement other retirement incomes such as Social Security, pensions, and savings. You can find out more.

• There is no way to pass on debts to your heirs or your estate.

• It is easier to get a reverse mortgage loan than a standard mortgage loan. A credit report will be required, but it is not necessary to determine if you are eligible for a reverse mortgage.

Disadvantages

• Borrowers may be able to use a lot of their equity and leave less to their heirs.

• Reverse mortgages have significantly higher closing costs and fees than traditional mortgages.

• Reverse mortgages have higher interest rates than conventional mortgages.

• To continue to pay the mortgage, the borrower must still pay the real estate taxes, homeowners' insurance, and home maintenance. If you do not pay, your home could be lost.

It is risky to tap into your home equity during retirement. Talk to your financial advisor if you are over 62 and think about a reverse mortgage to supplement your retirement income. To find the right loan for your retirement, get quotes from several lenders. Find out more about Home Equity Conversion Mortgages for Seniors.