Also known as home equity conversion mortgages (HECM), reverse mortgage loans allow homeowners age 62 and over to access a portion of their home’s equity which they have built up over the years. Payment of the loan is deferred until the homeowner sells their home, access a portion of their home’s equity, moves out of their home, dies, or otherwise fails to comply with the loan terms. There are no required monthly mortgage payments on a reverse mortgage loan, meaning that the interest of the loan is added to the loan’s principal balance every month. However, borrowers are required to continue paying property taxes, property insurance, and maintaining the home according to FHA guidelines
Let’s say an elderly couple has a conventional 30 year mortgage, they borrowed $300,000, and have a remaining balance of $50,000 left. This means that their equity is $250,000. If the couple decides to use a reverse mortgage loan, they then tap into their home’s equity and are able to access cash. This can be particularly useful for older homeowners who want to pull equity out of their home and not increase their monthly expenses.
To be eligible for a reverse mortgage, the FHA requires all borrowers on title be 62 years or older. Borrowers must also meet financial eligibility criteria as laid out by HUD (Housing and Urban Development). Most single -family homes, two-to-four unit owner-occupied dwellings, townhouses, and approved condominiums are eligible for a reverse mortgage. This is contingent on the property meeting FHA minimum property standards.
Reverse mortgage loans give homeowners the ability to use their equity as a cash source. This is especially useful for homeowners who do not have a steady paycheck to support them. A reverse mortgage loan can then be seen as a way for seniors to maintain their lifestyle without sacrificing time or other treasured assets. Homeowners can receive their loan in a variety of ways:
Before you embark on a reverse mortgage, it’s best to have an idea of how much money you would like to draw out of your home to avoid taking out too much or too little.
Although the advantages are straightforward, there are very real risks tied to reverse mortgages. Reverse mortgages come with larger closing costs, up to 5% of your home’s value in some cases. The loan also gets larger over time, increasing what it would cost for potential inheritors to pay for the home. Lastly, reverse mortgages are not well understood by many individuals, increasing the likelihood that borrowers may not utilize their loan the best way. Borrowers must be aware of the risk of foreclosure if they do not comply with the loan terms.
The best way to know if a reverse mortgage is right for you is to speak with a loan professional at Equity Smart. Fill in the form below and one of our best will reach out quickly!