There are a lot of opinions on the wisdom of using a reverse mortgage. Some people believe it is the best thing to happen to an older person’s finances. Others stress the pitfalls and dangers of this type of home loan.
The reality is somewhere in the middle. A reverse mortgage can be an excellent option for many homeowners. But it does carry unique rules and risks that people need to pay attention to before signing on the dotted line.
At TwinCity Lending, we take care of seniors with the respect and dignity they deserve. We will not steer you toward a home loan package that isn’t the right fit for you. But if a reverse mortgage is appropriate, we can help.
What Is a Reverse Mortgage?
A reverse mortgage is a home loan that works the opposite way of a traditional forward mortgage. In this type of loan, the home serves as collateral, just as it does in a forward home loan. But most other components of the mortgage work in reverse.
With a reverse mortgage, the homeowner borrows against the property’s equity. The lender makes payments to the homeowner instead of the other way around in this scenario. In essence, the borrower can convert their home equity into a significant amount of cash.
Seniors who qualify and choose to take out a reverse mortgage often use the cash to supplement their retirement income. Depending on the type of loan package, there may be stipulations on how the borrower uses the funds.
What Happens to a Reverse Mortgage If the Homeowner Dies?
Many concerns about reverse mortgages center on what happens when the homeowner passes away, moves, or sells the home. But protections are in place for this situation.
Lenders cannot offer a loan for more than the value of the home. Additionally, if the home’s value drops, making the loan balance larger than the home value, the borrower is not responsible for the difference. The borrower’s estate also will not need to repay that difference.
The loan is due in full when any of these events take place:
- The borrower passes away.
- The borrower sells the house.
- The borrower moves out of the home for more than a year. This situation can happen in cases where the homeowner needs to go into nursing care.
Typically, the heirs or the estate sell the home to repay the loan. In some instances, the estate or heirs may choose to pay back the loan and retain the property.
Three Types of Reverse Mortgages
For those considering taking out a reverse mortgage, it’s essential to understand the options.
- Single-Purpose Reverse Mortgage: This option is generally the least expensive loan choice. But it also is the most restrictive one. Single-purpose reverse mortgages are available through particular government and non-profit agencies. The loan paperwork specifies what the funds are for, and that is the only way the homeowner can use the loan money.
- Proprietary Reverse Mortgage: This loan option is a rarely-used reverse mortgage. It is only available to borrowers with much higher home values than what a typical reverse mortgage allows. Although you may be able to borrow more money, you are likely to have a higher interest rate, as well.
- Home Equity Conversion Mortgage (HECM): The HECM is by far the most common form of a reverse mortgage. This version does not have income or medical requirements. HECM loans have backing from the U.S. Department of Housing and Urban Development. Because of this fact, borrowers must go through a mandatory counseling session before proceeding with the loan. The homeowner pays for the counseling appointment.
Who Qualifies for a Reverse Mortgage?
This type of home loan is not as widely available as a traditional mortgage. There are specific requirements for qualification, and several of them relate to the home, not the borrower.
- You must be at least 62 years old and live in the home.
- The home must have sufficient equity, as determined by the lender.
- The property must be a single-family home. Two-, three-, and four-unit properties also may qualify if the borrower lives in one of the units.
- You must have enough income to cover home maintenance and other costs, such as insurance, taxes, and HOA fees.
- For HECM options, you will need to undergo the required HUD counseling session.
Is a Reverse Mortgage a Good Idea?
More than a million seniors have secured reverse mortgages since they became available in 1990. This loan option has allowed many homeowners to remain in their houses in spite of fixed retirement incomes. As with any home loan package, there are benefits and downsides to consider.
One of the greatest benefits to a reverse mortgage is the ability to remain in your home while freeing up money for expenses. Homeowners who have significant equity can supplement their income this way, allowing them to live a fuller life in retirement. Since there are no income or medical restrictions for obtaining an HECM, the reverse mortgage can be simple to get.
Many seniors like the idea of having additional income during their golden years. They appreciate controlling their money without having to rely on children or other family members for assistance. And as many people seek ways to age in place, the reverse mortgage is gaining popularity.
Those who qualify can receive their reverse mortgage funds in several ways:
- Lump-Sum Payment: This distribution is the only one with a fixed interest rate and typically has a cap of 60% of your equity.
- Equal Monthly Payments: These payments can last the life of the loan or for a set amount of time, depending on loan terms.
- Line of Credit: Seniors can draw against their equity and are only responsible for repaying the amount they draw.
If you or a loved one are considering a reverse mortgage, reach out to the experts at TwinCity Lending. We will thoroughly explain the ups and downs of this type of home loan to be sure you are set up for success. There are many scams out there, and we want to be sure you have protection.
It is our honor to serve the seniors in our community who have already contributed so much. Give us a call today to see if a reverse mortgage is right for you.