How Does A Reverse Mortgage Work?

There are a number of reasons why someone over the age of 62 would want to consider a reverse mortgage. If you happen to be one of these people, there is a lot of important information about reverse mortgages that you should know. Before you decide whether or not a reverse mortgage is actually the right move for you, you should gather all of the facts and information that you might need in order to make an intelligent and thoroughly informed decision on the matter.

Things To Consider Before Getting a Reverse Mortgage

How do you know if a reverse mortgage is actually the right decision for you? You may be asking yourself this question, and if you are, then you should definitely be sure to collect and review all of the necessary information about reverse mortgages and everything that they entail so that you can ultimately give yourself an educated answer to this very important question.

There are ways to make an informed decision as to whether or not a reverse mortgage is actually the best route for you to take. You must first think about and recognize why you are considering a reverse mortgage in the first place. What is your current financial situation? Is your current situation calling for you to make that particular move and get a reverse mortgage?

Are there any other plausible options that you could possibly consider according to your current situation? Depending on what your particular situation and circumstances are, (especially your financial ones) you should carefully and meticulously sort through and consider all of the possible options that may be available to you, and then decide if choosing to move forward with a reverse mortgage is the overall best answer to your situational circumstances in question.

What Is A Reverse Mortgage?

First and foremost, before you decide whether or not to do a reverse mortgage, you should first find out exactly what a reverse mortgage is and how a reverse mortgage works. A reverse mortgage lets you convert part of your home equity into cash money, and you do not have to pay any additional monthly payments nor do you have to sell your home in order to do so.

A reverse mortgage lender usually does not require repayment on the loan as long as you are residing in your home. In most cases, you do not have to pay any of the money back until after the last person on the loan contract has passed away. Other instances where a reverse mortgage loan would be due for repayment would be if you sold your home or if when/if you are no longer living in your home as your primary residence. The funds you receive from a reverse mortgage are also usually tax-free and the majority of reverse mortgages do not have any specific restrictions as far as income is concerned.

There are essentially 3 types of reverse mortgages:

      A single-purpose reverse mortgage – this type of reverse mortgage is one that some state and local government agencies and also some nonprofit organizations offer
      Federally-insured reverse mortgage – this type of reverse mortgage is also called a Home Equity Conversion Mortgage or (HECM); these reverse mortgage types are backed by the U.S. Department of Housing and Urban Development a.k.a. (HUD)
      Proprietary reverse mortgage – this type of reverse mortgage is basically a private loan backed by the company that develops it

The least expensive reverse mortgage type is the single-purpose reverse mortgage, although this type is not available everywhere. These reverse mortgages can only be used for one specific purpose and that purpose is specified by either the government entity or the nonprofit organization leader who is offering it. The lender can specify that the loan is only permitted to be used for something such as a property tax payment, a home repair or improvement, or etc. The majority of homeowners who have a low to moderate income can usually qualify for a single-purpose reverse mortgage.

A proprietary reverse mortgage as well as an HECM is a more expensive type of reverse mortgage. These kinds of reverse mortgages are also more expensive than most traditional home loans, and they usually have higher upfront costs as well. This is an important fact that should be considered, especially if you are planning to borrow a large amount of funds or are not planning on staying in your home for a long time.

HECM loans, in particular, are much more widely available, and are devoid of any specific medical or income requirements. Additionally, HECM loans can generally be used for virtually any purpose whatsoever.

So How Does A Reverse Mortgage Work?

Now that you have become pretty familiar with exactly what reverse mortgages are, you may be desiring a more in-depth and detailed explanation as to how exactly these reverse mortgages work. Having a better understanding of this information will help you to make a much more knowledgeable decision as to whether or not a reverse mortgage is the right choice for you.

Reverse Mortgage Requirements

One of the requirements to a reverse mortgage is that is has to be the only mortgage on the property. If you have an existing mortgage on your home that you still owe money on, you will have to pay that debt off either before you do the reverse mortgage or you can also use some of the money you receive from your reverse mortgage to pay the balance of your current mortgage in full. With a reverse mortgage, it is also a possibility that as the value of your home appreciates and you continue to get older, you might be able to qualify for more money. In this case, your reverse mortgage could possibly be refinanced so that you can borrow more cash against your home’s increased amount of equity.

In order to qualify for a reverse mortgage, you have to be at least 62 years old and your home must be your primary residence. You have to own your home or at least have a balance on your current mortgage that is low enough to be paid off with some of the money you receive from your reverse mortgage.

HECM Reverse Mortgages

These are backed by HUD and require you to have a HUD counseling session with a counselor before you can officially apply for the loan. This counselor must be from an independent housing agency that has been government-approved. Some of the proprietary reverse mortgage lenders will also require you to receive counseling before they will let you apply for a loan with them as well.

The HUD counseling session is either done through a face-to-face meeting or over the phone, whichever method is most convenient for you, the borrower. When you attend this counseling meeting, the counselor must explain all of the financial connotations and costs involved with the reverse mortgage loan. They must also inform you of and thoroughly explain the possible alternatives to HECM loans, such as nonprofit and/or government-based programs, as well as the other types of reverse mortgages that are available─ which are the proprietary reverse mortgages and the single-purpose reverse mortgages.

This professional housing counselor should also be capable of helping you to compare the prices of all the different reverse mortgages types as well as give you an in-depth explanation of how different types of fees, payment options, and other inclusive costs can ultimately have an effect on the total overall cost of the reverse mortgage loan over time. HUD can provide you with a list of these counselors. The majority of these agencies tend to charge about $125 for this counseling service. It is possible to pay this cost from the proceeds of the reverse mortgage loan. The good news is that you cannot be turned down for counseling just because you cannot afford to pay the counseling costs.

Another requirement that must be met when applying for a reverse mortgage is if more than one person is listed on the title of the home, each person whose name appears on that title are required to apply for the reverse mortgage, attend the HUD counseling session and sign the reverse mortgage loan papers.

There are only certain property types that are eligible for a reverse mortgage:

  • Single family one-unit home where owner resides
  • Two to four unit dwelling where owner resides in one of the units
  • Certain HUD-approved condominiums and planned unit developments
  • Certain manufactured homes that meet the requirements of the FHA

When you are applying for an reverse mortgage loan, the amount of money that you can possibly borrow is dependent on the following factors:

  • Your age ( of each the reverse mortgage applicant listed on the title)
  • The type of reverse mortgage that you are applying for
  • The appraised value amount of your home and the current interest rates

Generally, reverse mortgage loan borrowers who are older, have more equity in their homes, and owe the least amount on their homes, are usually able to get more money out of a reverse mortgage loan.

With a HECM loan, you have several payment options that you can choose from:

      A “term” option – This HECM loan payment option consists of fixed monthly cash advances for a specified amount of time. You will receive a fixed amount of money every month for a pr-determined length of time.
      A “tenure” option – This HECM loan payment option consists of fixed monthly cash advances for as long as your home is your primary residence. You will receive a fixed amount of money every month as long as you continue to reside in your home.
      A line of credit – This HECM loan payment option allows you to draw down your loan funds at any time, and in amounts that you choose, up until you have completely used up the amount of your line of credit.
      A combination of monthly payments and a line of credit – This HECM loan payment option combines two payment options together─ a term option and a line of credit option.

*It will cost you around $20 or so to change your HECM loan payment option at any given time.

A HECM loan will usually provide a larger loan advance at a lower amount of total cost when you compare it with other types of reverse mortgage loans (especially a proprietary reverse mortgage loan); however, if you happen to own a home with a pretty high value, it is possible that you might be able to get a larger loan advance from a proprietary reverse mortgage loan, instead of a HECM loan. Specifically, what this means is: if your home has a higher appraised value amount, and you have a smaller sized mortgage, you will likely be qualified to receive more money.

Another fact about the way a reverse mortgage works is the fact that the proceeds are not taxable, and will not affect benefits from Social Security and/or Medicare. Also, you get to keep the title to your home, and a reverse mortgage does not require monthly payments. Because the HECM loan is government-insured, you will never owe more money than the amount your home is actually worth.

Reverse Mortgage Fees And Costs

For a federally-insured HECM, you will be charged an origination fee, a mortgage insurance premium, and closing costs. You can also be charged servicing fees throughout the term of the reverse mortgage. HECM loan origination fees are dictated by law, although other fees and costs are set by your lender. An HECM saver is reverse mortgage product through which you can borrow a lesser amount of money in order to lower your upfront costs. (This can be a good idea if your reverse mortgage loan is for a really large amount of money which means much higher upfront fees.)

So, now that you have abundant amount of information on reverse mortgages and how they work, you are no ready to make a more informed and educated decision as to whether or not a reverse mortgage is a good option for you.

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