A Reverse Mortgage As An Alternative To Selling Your House

A reverse mortgage, or Home Equity Conversion Mortgage (HECM), refers to a special type of loan that enables senior homeowners to tap into their home’s equity. Rather than making a payment each month in order to reduce your debt, you’ll instead receive money and therefore increase your overall debt. In general, this kind of mortgage is a good option for anyone who wants to turn their considerable home equity into cold-hard cash.

Keep in mind that the borrower isn’t required to pay back the amount of the loan until they either move out or sell it. As long as they’re living in the home, the borrower doesn’t have to make any mortgage payments each month towards the balance of the loan. However, the borrower is still required to keep paying their homeowner’s insurance and property taxes.

Reverse mortgages are called “reverse” because rather than making payments each month to a financial lender, like a standard mortgage, the financial lender pays the borrower instead.

In the case of a traditional loan, the home buyer puts down a certain percentage of the home’s value and then pays off the loan amount over time. Also, a traditional mortgage loan can either be adjustable or fixed.

With a reverse type of mortgage, a financial lender will pay the homeowner a certain amount of cash based on the amount of equity they’ve built up over the years. The loan isn’t repaid until the homeowner moves out or dies, at which time either the homeowner or their surviving family members are responsible for repaying the loan.

Features of a Reverse Mortgage

• The amount owed on a reverse type of mortgage usually grows over time. Also, the outstanding balance accumulates interest and is added to the total amount owed each month.
• Financial lenders usually charge closing costs and origination fees as well servicing fees over the life of a HECM.
• Any interest isn’t deductible regarding income tax returns until the mortgage is paid off in whole or in part.
• Available in variable or fixed rates.
• Because you still have the title to your home, you are solely responsible for paying all other expenses including insurance, taxes, utilities, maintenance, etc.
• HECMs generally use all or some of your home’s equity, which leaves fewer assets behind for your heirs. However, a nonrecourse clause will prevent you or your heirs from owing more than what your home is worth when the time comes to repay the loan.

Because this type of mortgage enables homeowners to tap into their home’s equity, it’s often considered a good solution for seniors who can use their home equity in order to get them through their retirement years.

In order to qualify for this kind of mortgage, you have to be 62 years of age or older and also have a considerable amount of equity built up in your home. Also, you have to meet the financial criteria that HUD (Housing and Urban Development) establishes.

Paying Back a Reverse Mortgage

When borrowing on a reverse mortgage:

• If you live with either a spouse or partner, then your loan is required to be paid off once you move out, sell your home, or die.
• If you live alone, then your loan will need to be paid off once you move out, sell your home, or die.

Different Types of Reverse Mortgages

There are primarily three different kinds of Reverse Morgages currently available.

1. Proprietary

A proprietary type of HECM is a kind of loan you may want to consider for your particular needs. Typically referred to as a “jumbo loan program”, this unique loan is especially helpful for a home that has a higher value and can benefit from using this type of mortgage plan.

2. Federally Insured

A federally insured HECM is another kind of program that may be to your advantage. One of the most widely used kinds of federally insured reverse HECMs is the popular FHA (Federal Housing Administration) mortgage program. In order to be eligible for this kind of home mortgage, you’ll have to meet all FHA requirements. As a result, your loan will then be insured and backed by the U.S. federal government, which makes it very appealing for any financial lender.

3. Single Purpose

A single purpose HECM is one of the most common kinds of mortgages used today. With this kind of reverse type of mortgage, the money can only be used for one (single) purpose. The financial lender will determine the purpose as well as regulate it.

What is the Cost of a Reverse Mortgage and How Much Money Can I Get?

In most cases, HECMs cost more than other traditional home mortgages. The actual cost will primarily depend on the kind of loan you end up choosing, the financial lender you select, and the amount of money you receive upfront. The amount of money you can receive with a reverse mortgage is based on the market value of your home, the interest rates, and your age.

Alternative to Reverse Mortgages

Besides using a reverse mortgage, here are a few other ways to access the equity in your home that may work better for you.

• Refinance your current mortgage
• Consider downsizing or selling your home
• Take out a line of credit or home equity loan
• Consider selling your home to a third-party or to your children

Example of a Reverse Mortgage

Howard Smith, age 69, owns a home with a market value of $250,000 and with $210,000 in total equity. Howard has a mortgage balance of approximately $40,000.

Howard’s wife died and he lives alone. He wants to remain in his home, but can’t meet all his monthly expenses and continue to make his mortgage payment of $610.00 each month. Even with his pension and Social Security income, he still comes up short about $185.00 each month. What can Howard do?

Howard can secure a HECM (tax free) for about $142,500. Howard can take a $40,000 lump sum and then apply it to his current mortgage and the balance in payments of $680.00 each month. Once Howard pays off his mortgage in full, his monthly income will grow to almost $1300.00. This amount equals $610.00 each month for his mortgage payment in addition to another $680.00 coming from his HECM.

For most people approaching their golden years, the ability to stay in your home and stay on top of their finances is the main priority. A reverse mortgage can also provide the necessary income to cover any unexpected medical expenses, reduce credit card debt, or supplement your current income. In any of these scenarios, a reverse mortgage may be the answer.