In recent years, many retirees have expressed an interest in obtaining a reverse mortgage. Some seniors are confused about what a reverse mortgage really is, and if it is right for them. I have found that there are specific requirements for qualifying for any type of reverse mortgage. There are some general guidelines for anyone who is considering applying for one of these loans. It is important to realize that a reverse mortgage is not the answer for everyone, and it pays to understand how it works before considering taking this step.
Reverse Mortgage Definition
As homeowners, sometimes we may search for a way to increase our income in retirement without taking on an additional burden of debt. Considering a reverse mortgage could help us with that financial decision. This type of mortgage is completely opposite to a traditional mortgage where we have to make payments to a lender for several years. A reverse mortgage is one where a lending organization such as a bank lends money to a homeowner for the purpose of acquiring equity in the home. With a reverse mortgage, we as owners, do not continue to gain equity.
General Guidelines
A person must be at least 62 years of age in order to qualify. The home must be paid for completely or only have a minimal mortgage balance that can easily be paid off with loan proceeds. In most cases, it must be a single-family dwelling, a townhouse, or condominium. The home must meet HUD standards and there must be enough equity in it to justify a reverse mortgage loan. The reverse mortgage lender will be considered the first lien holder. The proceeds from the loan must be used to pay off the existing mortgage. There are three types of reverse mortgages that are available from which to choose. I suggest reviewing all the types to find the right one.
Single-Purpose Reverse Mortgages
State and local governments offer these mortgages to homeowners who must qualify based on certain income restrictions. These funds must be used for a single purpose and cannot be used for anything else. It might be that the reason for wanting the funds is to pay property taxes or do some renovating of the home. Some people prefer this type of reverse mortgage simply because it is the least expensive. Another reason for choosing this type is that it does not require a monthly payment. The loan does not have to be repaid until the home is sold or the owner moves to another residence or dies. The single-purpose mortgages require the owner to maintain homeowners insurance at all times. If the insurance is allowed to lapse, the debt becomes due at that time. This type of loan is not as popular as the other types.
Proprietary Reverse Mortgages
Homeowners with homes that are worth more than approximately $675,000 may want to consider a proprietary reverse mortgage. Homes that appraise for this amount or more may qualify for a larger loan. Monthly mortgage insurance payments are not required, and they are not federally insured. Private companies that choose their owner lenders own these proprietary loans. There are usually high upfront fees for such items as appraisals, origination fees, and closing costs. A proprietary loan may have a higher interest rate, because of no requirement for mortgage insurance. Some lenders charge a monthly service fee.
Home Equity Conversion Mortgages
This is the only type of reverse mortgage that is federally insured and approved by the U.S. Department of Housing and Urban Development. Because these loans can be used for any reason and there are no income limitations, these are the most popular reverse mortgages. These mortgages require higher upfront costs than traditional home loans, but allow borrowers to access a portion of their equity in a higher-valued home. If the value of a home is approximately $720,000, the owner qualifies for either loan with an adjustable rate or a fixed rate mortgage.
- Fixed Rate - This option allows the homeowner to lock in a low interest rate. In order to receive this option, a lump sum disbursement is required.
- Adjustable Rate - Choosing this option gives the homeowner more flexibility. This option allows the owner to take a lump sum, a monthly payment, a line of credit, or any combination of these options. If a line of credit is chosen, it cannot be reduced or cancelled. It can even be opened at a later date, if the owner chooses.
Home Equity Conversion for Purchase
It is possible with this option for a retiree to purchase a different home and secure a reverse mortgage at the same time. This is a great way to save money. With this option, there is only one set of closing costs instead of two. This is a big advantage for seniors.
As retirees, we are constantly looking for ways to save money and increase our income at the same time. At this point in our lives, we do not want to incur more debt. Having equity in our homes is a source of comfort that we do not want to forego. Reverse mortgages are designed to allow us to tap into our home equity without having to pay it back until we sell the home and move away. This is a great solution for those of us over 62 years of age who own our own homes. We have built up a considerable amount of equity that we can draw from. If the pros outweigh the cons, it might be smart to consider a reverse mortgage. It is good to know that once the reverse mortgage is in place, there are no restrictions as to how the proceeds can be spent. Sometimes we need extra cash to cover healthcare costs or things that make life better. A reverse mortgage can make life a little easier for retirees with insufficient incomes. As we age, we find that we have more expenses than we did when we were younger. It is much more expensive to pay for healthcare and to live the lifestyle that we prefer. A reverse mortgage enables us to benefit from the hard work we put into making our home better. Now it is time for our home to repay us.
