By now, most adults have heard of reverse mortgages, but many are uncertain as to what these loans entail. What is a reverse mortgage? In a nutshell, these loans are unique loans designed to help seniors, over 62 years of age, access a portion of the equity in their home.
What Is a Reverse Mortgage? Who Qualifies for These Loans?
Reverse mortgages are very different from traditional mortgage loans. With a reverse mortgage, seniors convert a portion of their home equity into cash. If a borrower still owes money on an existing mortgage loan, this cash must be used to repay the balance of the original loan. Any leftover proceeds can be used however the borrower wishes.
In addition to asking what is a reverse mortgage, many consumers also wonder how these loans differ from forward mortgage loans. What sets these loans apart is that these loans do not become due until borrowers pass away, sell the home, or decide to vacate the residence. The proceeds seniors receive are tax-free and will not affect Social Security or Medicare benefits.
There are three types of reverse mortgages: Home Equity Conversion Mortgages (HECMs), proprietary loans, and single-purpose loans. HECMs are insured by the federal government and make up more than 90% of all reverse mortgages. Proprietary loans are funded by private institutions, and single-purpose loans are funded by nonprofit and other organizations. As the name suggests, single-purpose loans must be used for a specific purpose, which is typically dictated by the provider. Today, proprietary loans and single-purpose loans are very rarely given to borrowers.
To qualify for an HECM, borrowers must be 62 years or older, own their home, and have a small remaining mortgage balance. HECMs are only available on primary residences. Eligible residences include one to four unit properties, as well as approved manufactured homes, condominiums, and co-ops.
What Is a Reverse Mortgage? Important Information on Payouts and Guidelines
After asking what is a reverse mortgage, many seniors also want to know how much they are allowed to borrow. The amount seniors can borrow will depend on their age, interest rate, value of their home, and amount of equity in the home. The loan product seniors choose will also affect their payout. The Federal Housing Administration (FHA) currently offers three different HECMs: the HECM Standard, HECM Saver, and HECM for Purchase. Of these options, the HECM Standard provides the highest payouts. Borrowers who choose the HECM Saver will typically receive between 10 to 18% less than those who choose the Standard. However, these borrowers will get to take advantage of reduced costs.
The HECM for Purchase Program offers seniors the chance to purchase a new home with the proceeds of a reverse mortgage. This program helps seniors move into a new residence without taking a forward mortgage loan and being responsible for making monthly mortgage payments.
To understand what is a reverse mortgage, it is also important to understand what it takes to maintain these loans. After getting a loan, borrowers must continue to make necessary home repairs and take care of their property. Borrowers must also pay their property taxes and homeowners insurance. As long as these requirements are met, seniors can continue living in their home until both borrowers pass away or decide to move from the residence.