How Does a Reverse Mortgage Work?

The post How Does a Reverse Mortgage Work? by Megan Brown appeared first on Benzinga. Visit Benzinga to get more great content like this.

Seniors and retirees who find themselves in financial trouble should look into a reverse mortgage. If they need supplemental income, money for healthcare or want to pay off their current mortgage, they could qualify to start using the equity from their home. It can be a good idea if you are older than 62, have at least 50% equity in your home and plan to continue living in and maintaining the home for the foreseeable future. Simply stated, a reverse mortgage is a loan against the value of your home. It allows homeowners to turn their equity into cash. 

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What is a Reverse Mortgage?

A reverse mortgage uses your home as collateral. This type of loan pays the homeowner for the equity they already hold in their home. Homeowners don’t need to pay anything upfront. They just need to qualify for the lender’s guidelines and decide how they would like their payment to be distributed. Over the life of the loan, the homeowner’s debt increases as the home equity decreases. Once the homeowner moves or dies, the sale of the house pays off the reverse mortgage. 

As home values have increased over the last few years, many retirees and seniors may hold a lot more equity in their homes than they ever thought possible, which could make a reverse mortgage an attractive option. 

Types of Reverse Mortgages

Home Equity Conversion Mortgage (HECM)

• Loan is federally insured and backed by the U.S. Department of Housing and Urban Development.
• Loan is commonly used for reverse mortgages as their requirements do not have income or medical limitations.
• Counseling is required for homeowner to fully understand risks involved, costs associated with the loan and payment options. 
• Current interest rates, the homeowner’s age and the value of the home determine how much money can be borrowed. 
• An HECM is typically a more expensive mortgage to secure because of high upfront costs and fees.

Single-purpose

• Being backed by the state and local nonprofit organizations helps keep interest rates and other costs down.
• Restrictions are set in place. The lender approves the loan only for a single-purpose item, such as taxes or home repairs. 
• Loan is not readily available in all states. 
• Repayment is not needed until the homeowner either dies, moves residences or ownership of the property changes. 

Proprietary

• This type is backed by private lenders and generally used for homes of higher value. The lending limit for an HECM is $970,800. So, if your home is worth more than this lending limit, a proprietary mortgage may be a great way for you to get more money out of the home. 
• Counseling may be required for the homeowner to understand the difference between this type of loan and the HECM and see the advantages and disadvantages to each. 
• Mortgage insurance is not needed with a proprietary reverse mortgage because it is not federally insured. 

How Do You Receive Funds From a Reverse Mortgage?

Several options are available for receiving funds from a reverse mortgage. It depends on what you will be using the money for, how much you want to take and what works best for you and your situation. As with any type of mortgage or loan, shopping around is encouraged. It is worth gathering quotes from multiple reverse mortgage lenders so you can get the best interest rates and the overall best deal. 

Lump-sum payment: This allows you to receive all the money that you are borrowing as one payment when the loan closes. Then you decide how to divvy it up and use the cash.

Annuity: Also known as a tenure plan, this option gives you equal monthly payments for as long as you live in the home as your primary residence. This is basically living on a fixed income and knowing exactly what to expect each month. 

Term payments: Equal monthly payments are given with this option for a set term. Many borrowers request a term of 10 years. 

Line of credit: With this option, the money is there and available to the homeowner to access when needed. Interest is only applied to the money that gets borrowed. This is a great option for someone who wants to know that they have the money on hand, but can also decide whether they really need to use it or not. 

Monthly payments plus line of credit: Equal monthly payments are given in this option, but the line of credit is still there to access if desired. 

Term payments plus line of credit: In this option, the homeowner decides the term of the payments (usually 10 years) but still has access to a line of credit during and after the term ends. 

Who Benefits From a Reverse Mortgage?

As long as you are older than 62 and have at least 50% equity in your home, you can benefit from a reverse mortgage. Maybe funds are needed for medical expenses, day-to-day living expenses or something unexpected. As a senior who is not working, it’s hard to know what to do in the event of an increased cost of living or unforeseen circumstances. A reverse mortgage can be a big help during financial hardship.

This money is essentially already yours because it’s from the equity in your house. You can use it for what you need or what you want as long as it’s not a single-purpose reverse mortgage. Even grandparents who want to contribute to schooling, weddings or expenses for their kids or grandkids can look into this as a viable option for added income. 

Drawbacks of Reverse Mortgages

One drawback of a reverse mortgage is if someone lives with you who is not on the deed. When the house eventually sells, they may have no claim to the assets. If you don’t inform them of how the reverse mortgage works or that you have one, they will be shocked when the lender wants their money. It can be a messy situation if you are not upfront with others living with you while you have a reverse mortgage.

Scams are out there, and risks are involved. Some companies scam the elderly with promises of quick cash and low fees, so be careful and make sure you use a reputable reverse mortgage lender. Do your research and look into the National Reverse Mortgage Lenders Association if you need more help finding a suitable lender, or keep reading to find out Benzinga’s favorite reverse mortgage lenders.

Best Reverse Mortgage Lenders

As always, Benzinga can take care of some of the hassles for you. Benzing has already found the best reverse mortgage lenders so you don’t have to. Just reach out to any of these great lenders and get started today. 

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Best For

Self-employed

Minimum Credit Score

620

get started

More Details

Avg. Days to Close Loan

30 – 40

Minimum Credit Score

620

1 Minute Review

Luxury Mortgage offers standard products like conventional loans, VA loans, Jumbo loans and FHA loans. It also has more specialized products like bank statement loans, asset qualifier mortgages and no doc investment property loans. If you’ve had a hard time finding a mortgage due to erratic income, being retired or buying an investment property, Luxury Mortgage is worth a look.

Best For

• Self-employed professionals
• Retirees
• Investors
• Condo buyers

Pros

• Wide variety of mortgage products
• Niche products like bank statement loans
• Works with many state home buyer assistance programs

Cons

• Only available in 29 states

Best For

High Yield Savings

Overall Rating

get started
securely through Quontic Bank’s website

Best For

N/A

Minimum Credit Score

N/A

Get started
securely through AAG’s website

Conclusion

Now that you are up to speed on what exactly a reverse mortgage is, think about whether this is something you may be interested in. You need to decide which type of reverse mortgage is right for you and how you want to receive your equity. Take advantage of the required counseling and ask questions. Make sure you completely understand what your reverse mortgage lender is telling you. And as always, keep coming back to Benzinga for more information to ensure you have the most up-to-date financial options around. 

Frequently Asked Questions

The post How Does a Reverse Mortgage Work? by Megan Brown appeared first on Benzinga. Visit Benzinga to get more great content like this.

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