A reverse mortgage is available to homeowners who are aged 62 or older. This type of mortgage is typically offered to people who are looking for money in order to finance a home improvement, pay off their current mortgage, pay for health care expenses, or to supplement their retirement income. The best way to describe a reverse mortgage is a product that allows a homeowner to convert part of the equity in their home into cash without the need to sell their home, or indeed to pay any additional expenses.
A standard mortgage will require a borrower to make monthly payments to the lender, however, a reverse mortgage will not require any payments as long as the borrower lives in their home. The loan will then be repaid once the borrower dies, sells their home, or if the property is no longer their primary residence. A reverse mortgage differs from a conventional mortgage in that they generally have no income restrictions and the proceeds are usually tax-free.
There are three main types are reverse mortgage and these are:
The interest rates offered on a reverse mortgage are typically determined on a program by program basis, and can be offered at either a fixed or adjustable interest rate. With that said, prior to 2007, the vast majority reverse mortgage programs were offered with an adjustable interest rate. However, a potential borrower should be aware that some of the new fixed-rate reverse mortgage programs will only offer cash proceeds that are equal to half of that offered by an adjustable rate reverse mortgage.
As with traditional mortgage products, it is important for a potential borrower to shop around when they are considering a reverse mortgage. Lenders will typically offer differing terms in interest rates, although there is a requirement to speak with an HUD counselor if an applicant is considering applying for an FHA/HUD reverse mortgage.
There are also a number of costs involved to obtain a reverse mortgage and these include mortgage insurance, which will be 2% of the appraised value, an origination fee which has a cap of $2500 or 2% of the first $200,000 and 1% thereafter, which will provide an overall cap of $6000. The borrower will also need to pay title insurance, although this varies from lender to lender, title attorney, and county recording fees, real estate appraisal which will typically cost $300-$500, and the same amount of money will be needed if a survey is required. There is also an additional monthly service charge was generally ranges from $25-$35, although this is usually added on a monthly basis to the balance of the loan.
It must be said that the highest cost associated with a reverse mortgage is the interest. However, as mentioned interest payments are typically added to the balance of the loan, and therefore no payments are due until the borrower decides to leave the property. Another factor that is of a huge benefit to reverse mortgage borrowers is that the amount due on a reverse mortgage will never exceed the value of the property once it ends.
There are also several payment options available on a reverse mortgage and these include:
A reverse mortgage borrower is also able to change their payment option at any time and there is typically a fee for doing this which is approximately $20, in the case of an HECM.
As mentioned, a reverse mortgage loan is not taxable, and it typically will not affect any Social Security or Medicare payments. Even though a reverse mortgage must be repaid when a borrower no longer uses the home as their principal residence, the HECM program does offer an alternative. A borrower will be allowed to reside in a nursing home or other medical facilities for up to 12 months before the loan needs to be repaid.