If you’re an individual aged 62 or older and you feel that you need some financial assistance, you may benefit by looking into a reverse mortgage. For some, a reverse mortgage may offer financial stability in retirement or an alternative to loans or other lines of credit. In this guide, we’re going to discuss several types of reverse mortgages, how they work, who can qualify, how much money you can get, and when it needs to be repaid.
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What Is a Reverse Mortgage?
Reverse mortgages are programs that allow individuals to receive a portion of their home equity paid back to them in the form of a loan. These present an option for individuals aged 62 and over who require some supplementary financial assistance. Many individuals choose to use their loan to pay off the remainder of their mortgage, or to simply aid in the costs of retirement.
In order to qualify, you must be at least 62 years of age and your current mortgage payment must fall into a particular category. There are a few different options for reverse mortgages, which we will go over below.
HECM: Home Equity Conversion Mortgages
Often the term “reverse mortgage” is used interchangeably with “home equity conversion mortgage.” These are federally regulated programs that pay borrowers back some of their equity. These are the most common forms of reverse mortgages, and are fairly easy to come by, as long as you meet the qualifications.
There are several options for how you would like to be paid your equity and how much you need to be paid. There are very few stipulations on how the money can be spent, but you will have to meet the basic needs of your mortgage and property taxes, and keep your home as your primary residence in order to continue being paid a reverse mortgage.
Single-Purpose Reverse Mortgages
This type of loan is not regulated federally; instead, it is often run by statewide programs and non-profits. In this scenario, you may need help paying for just a specific item, rather than a source of supplementary income or ongoing liquidity. A single-purpose mortgage will be paid out by one of these programs in a sum that will cover the cost of an approved need. Depending on which organization you go through, the money may (or may not) be required to be spent on something related to the home, such as a repair, costs of maintaining the home, improvements, and/or monthly expenses that go toward the home (like utilities, taxes, insurance, etc.).
Proprietary Reverse Mortgages
When you apply for a standard HECM reverse mortgage, you can only take a portion of your equity — not the full value of your home. Your home will be appraised and you may be offered a loan based on the price of your home and your current equity, or the federal limit for the maximum of an HECM reverse mortgage ($679,650) — whichever price is lower. However, in the case of a proprietary reverse mortgage, those limits don’t apply. These loans are offered by third-party private lenders and they will usually offer more money than a federally compliant HECM is willing to. These are great options for individuals who have high value properties.
How Does a Reverse Mortgage Work?
When Does a Reverse Mortgage Get Repaid?
Unlike most other loans or lines of credit, reverse mortgages aren’t always repaid per se. Instead, the reverse mortgage gives the lender a limited lien on the property. In some cases the lender will use proceeds from the sale of a home to repay the reverse mortgage, while in other cases it will be repaid from the estate of the deceased borrower.
Commonly, a reverse mortgage will be repaid after the borrower moves out of the home as their primary residence. However, there are other instances that apply as well. If the borrower were to pass away (and had no living spouses or other individuals on the loan living in the home), the debt would need to be repaid in that instance as well.
In addition, if the other aspects of the agreement are not met, the reverse mortgage may need to be repaid. For example, the costs of maintaining a home still need to be met by the loan borrower. This includes any applicable taxes, property insurance, utilities, and other expenses. The lender will not be responsible for these costs, which means if they aren’t handled by the homeowner, the reverse mortgage will be cancelled and will need to be paid back.
Who Qualifies for a Reverse Mortgage?
As we talked about earlier, you must be 62 or older in order to qualify for a reverse mortgage. In addition, not all individuals with a mortgage may qualify. In order to apply and be accepted to this program, your remaining mortgage and monthly payments due must be low. The other option is that you are a homeowner that has already paid off their property. What’s more, you must plan to live at your current residence indefinitely. If you are to move out of your home, no longer making it your primary residence, your reverse mortgage will be cancelled.
How Much Money Can I Get From a Reverse Mortgage?
With an HECM, your house will be appraised and you can be granted an amount of equity loan that aligns with the total cost of your home or that reaches the maximum limit ($679,650), whatever amount is lowest.
As for the single-purpose, these are commonly much smaller because they are intended for just one expense, that is up to you and the organization to decide on the total. Proprietary reverse mortgages are commonly associated with higher priced properties and as such usually pay out more than the federal limit. However, that is to be decided between you and the private lender.
These can be paid out in a number of ways depending on the age of the borrower, the remaining balance on the loan, and the interest due. Some options may allow a lump sum to be paid out, while others will offer monthly payments to the borrower. You may indicate that you need some additional income just for a short time, in which you will decide on a term and you will only be paid during that time or you may choose a maximum total amount to be paid over a more indefinite time period. It completely depends on your personal situation, the organization you go through, and how this type of supplementary income may help you.
How Can the Money Be Used?
As far as an HECM goes, you can use the money for whatever you may need it for. There are no regulations around what you can spend it on. Other loans, like the single-purpose or proprietary reverse mortgages may need to be spent on specific expenses. In some cases, the organization may simply require that you disclose what the expense is before they cash it out, but in other situations, you may be required to spend the money only on expenses related to your home. It completely depends on the organization that you choose to go through and what rules and regulations they may have.
Can I Lose My Home Through a Reverse Mortgage?
Technically, yes, an individual can lose their home through a reverse mortgage if all expenses and stipulations of the agreement are not met. Reverse mortgages come with a certain amount of fees that must be covered, in addition to the regular costs of your home. If you are unable to cover the cost of your mortgage and fail to pay it, your reverse mortgage will likely be cancelled and you may be responsible for paying all of the reverse mortgage back upfront. If you aren’t able to cover this total cost, there is a possibility that your home could be foreclosed on.
However, before you can enter a reverse mortgage, the organization is required to do everything they can to make sure you are a good candidate for the program. Every detail is explained thoroughly and you will be checked to make sure that you can afford the regular cost of your mortgage, the fees involved in the reverse mortgage, and any other expenses you have relating to your home. If you are deemed financially able, only then will you be approved for the program. As I mentioned earlier, some individuals choose to use their reverse mortgage to pay off their current mortgage, which means they won’t have to pay anything back until after the home is sold, moved out of, or the borrower happens to pass away.
Although reverse mortgages aren’t for everyone, they may be a good option for you if you feel that your financial situation could use some help. Before you are approved, you can sit down with a lender to have them go over all of the regulations and they will let you know exactly what expenses you are responsible for, before you enter the agreement. It’s encouraged that you bring another individual into the process with you, just to give you a second opinion before you make a decision. The same could be said for most large financial decisions, but ultimately, the choice is up to you. If you feel that a reverse mortgage could help you better maintain your house or pay for your retirement, you should meet with a representative and talk about your options.
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