Have you heard or seen the commercials about reverse mortgages and thought to yourself that they must be too good to be true? After all, how is it possible to get a loan without monthly payments? There has to be some catch, right? Well, here is all you need to know about reverse mortgages to see if they are the right choice for you.
What Is A Reverse Mortgage?
Thousands of American’s find that they don’t have enough money to live on once they retire and reverse mortgages present a solution. A reverse mortgage is a type of loan for senior homeowners 62 and older that allows them to use part of their home’s equity.
With this type of loan, there are no monthly payments, and the borrowers use the home as collateral. Loan funds can be distributed by structured payments every month, an equity line of credit, or one lump sum. Proceeds from reverse mortgages are not taxable. The IRS views this money as a loan advance.
Federal law requires lenders to construct the transaction so that the loan amount won’t exceed the value of the home. There is a small chance that this could still happen if the borrower lives a long time or the house’s value drops.
Typically, reverse mortgage loans become due once the last homeowner dies, permanently moves out, or the home sells. The borrower must repay these loans, though, so it’s not free money like some people may assume. The estate then has six months to sell the home to pay off the balance of the loan or repay it.
The estate isn’t liable if the house sells for an amount less than the balance remaining of the reverse mortgage. However, the estate inherits any remaining equity, if there is any after the loan is repaid.
The nice thing about these loans is that they’re designed for retired people on fixed incomes and can be used for essentially anything including; to supplement your social security income, home repairs, vacations, or to pay for nursing home care. These loans aren’t for everyone, you don’t relinquish your ownership rights or property title, and you’re not selling your home to a bank.
Types Of Reverse Mortgages
There are three primary types of mortgages.
HECM or The Home Equity Conversion Mortgage
Most types of reverse mortgages below $679, 650 are HECMs. These mortgages are insured by federal institutions and supported by the U.S. Department of Housing and Urban Development. HECMs have more costs up front and are usually more expensive than traditional home mortgages. These loans are the most popular because there are no medical requirements or income limits. You can use this type of loan for anything.
Single-Purpose Reverse Mortgage
This loan is often the least expensive. Nonprofit, local, and state agencies offer these types of loans. The entity funding the loan specifies the use of the money for one purpose such as property taxes or home repairs. Another difference with this type of loan is that it becomes due if the city or county condemns the home or the homeowner fails to maintain homeowner’s insurance on it. Borrowers may choose the loan because there are fewer fees and interest to pay.
Proprietary Reverse Mortgage
Proprietary reverse mortgages are for substantial advances on homes with higher values. The 2018 lending limit for federally backed HECMs is $679,650. You can borrow more with a proprietary loan.
These mortgages are not federally insured and therefore don’t have a lot of mortgage insurance premium or upfront fees. Monthly premiums reduce the amount of money that homeowners can borrow. One negative factor is that because there is no mortgage insurance, interest rates may be higher, and lenders may finance less money in proportion to the home’s value.
The best way to decide if a reverse mortgage loan is right for your situation is to contact a reputable and experienced mortgage broker or a real estate attorney, like us at Gary I. Handin P.A.. We can answer any questions that you have about the process and help you choose the right type of loan based on your home’s value and what you need the money for.