A reverse mortgage makes life after retirement easier. It allows homeowners, aged 62 or older, to convert part of the equity in their home into cash without selling their property. Borrowers can typically use this money for any purpose like home repairs or out-of-pocket medical expenses. If you’re considering getting a reverse mortgage, there are a few important things you must know. Keep reading to find out.
How a reverse mortgage works
Unlike a regular mortgage wherein you make payments to your lender to buy a home over time, with a reverse mortgage, your lender pays you a certain sum based on the equity you have. Equity, in simple words, is the current market value of your home minus any mortgages you owe.
The money you get in a reverse mortgage is usually not taxable. You can receive the money in a single lump sum, in monthly installments, or as a line of credit. In general, borrowers are not required to pay back the loan amount. However, the loan needs to be repaid when the borrower dies, sells their home, or moves out permanently. In case the borrower passes away, their heirs can either repay the loan if they wish to keep the home or sell the home to pay off the loan.
Types of reverse mortgages
Reverse mortgages can be of different types, such as:
Home Equity Conversion Mortgage (HECM)
This is a highly popular type of reverse mortgage. HECMs are supported by the U.S. Department of Housing and Urban Development (HUD) and are usually more expensive than conventional mortgages. But the most significant advantage is that you can use the loan amount for any purpose. You can also choose how to receive the money: in a lump sum, fixed regular payments, line of credit, or a combination of monthly payments and line of credit.
Proprietary reverse mortgage
This type of loan is offered by a private lender and is not backed by the government. If you have a higher-valued home, proprietary reverse mortgages may be a great option to get a larger loan.
Single-purpose reverse mortgage
This loan is typically provided by nonprofit organizations and state and local government agencies. As the name suggests, single-purpose reverse mortgages can only be used for a specific purpose, such as paying off property taxes or making home improvements. This type of loan is available in select regions only.
Reverse mortgage requirements
You might already know that the minimum age to qualify for a reverse mortgage is 62. But there are a few more eligibility requirements. These are listed below:
You must own the property, and it must be your primary residence.
Your home must have sufficient equity for the reverse mortgage loan you require.
You must have enough money to pay taxes and homeowners insurance premiums on the house.
You must not be a delinquent on federal debt.
You must participate in a HUD-approved counseling program.
Your home must be maintained and in a reasonable condition.
Pros and cons of reverse mortgages
Here are some main benefits and drawbacks you must consider before applying for a reverse mortgage.
The money can be used for paying off medical expenses, debts, or any other purpose.
The loan amount need not be repaid out of pocket.
You can receive the money in any mode you prefer, be it lump sum, monthly payment, or a line of credit.
The amount you receive is tax-free.
You are required to maintain the home, and pay property taxes and homeowners insurance.
Closing costs, including fees, can be quite high, and could reduce the amount of cash you get.
The loan has to be repaid if you have heirs willing to inherit your home.