Talk about bad press. A reverse mortgage is probably something seniors have heard about and may have considered, but many have been scared away not really knowing the full story. If you are a senior or are close to one, read on to find out how it really works and then decide for yourself if a reverse mortgage could work for you or a family member.
What is it? A reverse mortgage is a loan set up for seniors to be able to take their home equity and receive it in one lump sum or multiple payments. The payment of the loan is deferred until the homeowner passes away, the home is sold to another owner or the senior goes into another home like an aged care facility. Unlike a conventional loan where the equity increases as the homeowner pays the loan down until it is paid off (typically after 30 years), a reverse mortgage loan gives the homeowner the equity up front and the debt on their home increases each month.
What are the requirements? To be eligible for a reverse loan, the homeowner must be 62 years or older and the house has to be their primary residence. The mortgage on the property needs to be paid off or have a small balance. There are no income or credit score requirements and the payment can be in a lump sum or a monthly check or a line of credit or all three.
How much money can I get and what are the loan fees? Typically the amount you can borrow will depend on your age, the current interest rate and the appraised value of the property. Just like a conventional home, there are fees to get the loan processed and they are basically mortgage insurance premiums, monthly lender fees (costs to disburse money each month) and loan points or application fee. There are also regular closing costs for things like recording, escrow or closing agent and the title policy.
What loan programs are available? There are some financial institutions that will do fixed-rate mortgages but the majority of them are adjustable-rate loans. A popular reverse loan today is the Home Equity Conversion Mortgage, which is insured by the U.S. Department of Housing and Urban Development. Fannie Mae also offers the Homekeeper Mortgage program.
Other questions? You may be wondering if you outlive your loan will the bank take away your house and the answer is no. You are not required to repay the loan as long as your or one of the borrowers is still living in the house and keeps the insurance and property taxes current. Also, when you sell your home, you or your estate will repay the cash you received from the reverse mortgage plus interest and other fees to the lender and the remaining equity, if any, will belong to you or your heirs.