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How to compare reverse mortgages

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An unconventional way for seniors to access funds through the equity in their home.

With a reverse mortgage, you can borrow against equity while still maintaining ownership of your home. But be mindful of the costs and potential risks.

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What is a reverse mortgage?

A reverse mortgage is a government-insured home loan that allows senior citizens to convert the existing equity in their home into liquid cash. Because you can use this money toward other debts, medical bills or many other purposes, it can offer the financial liberty you need to make the most of your retirement.

A major benefit of a reverse mortgage — also called a home equity conversion mortgage (HECM) — is that it provides borrowers with cash to fund their retirement without having to make payments like you do with traditional mortgages. Instead, the lender makes payments to the borrower through a lump sum, monthly payments or a line of credit.

Payment of the mortgage is not required until you either sell your home or die.

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Reverse mortgages also provide borrowers with flexibility to qualify as they don’t have to undergo a credit check.

How does a reverse mortgage work?

A reverse mortgage allows homeowners ages 62 and older to convert part of the equity in their property into cash without having to give up ownership or take on monthly mortgage payments. It’s called a reverse mortgage because the lender makes payments to the borrower, instead of the borrower making monthly payments to the lender.

The loan is then repaid when you decide to sell the property, whereby the remaining equity is transferred to you, or when you die.

Pros and cons of a reverse mortgage

Pros

  • Asset security. You won’t give up title to your home over your loan period, which means you retain full ownership of the property.
  • No monthly payments. As long as your home is your primary residence, you continue maintaining it and you’re current on property taxes and insurance, you don’t have to pay your lender monthly. The loan isn’t due until you move out of the property, though you can repay it at any time without prepayment penalties.
  • Access to funds. By borrowing against the equity in your home, you can convert a portion of your equity into cash, which can help fund your retirement and free up your cash flow.
  • No restriction on funds. For HECMs and private-sector reverse mortgages, you can use your however you’d like — to fund a grandchild’s education, go on a vacation, pay for medical expenses or pay for retirement accommodation.

Cons

  • High costs. Reverse mortgages are often more expensive than traditional mortgage types due to high upfront and ongoing costs like origination, mortgage insurance and title insurance fees that can set you back up to $35,000.
  • Duty to repay loan. If you find yourself needing to permanently leave your home due to medical or other reasons, you must be prepared to pay back the full loan.
  • Family inheritance. A reverse mortgage can decrease the amount of equity you have in your property, leaving less money for your family when you die.

How can I use a reverse mortgage?

A reverse mortgage provides you with access to additional funds that you can use toward:

  • Debt consolidation
  • Purchasing a new property
  • Vacations
  • Living expenses, such as retirement accommodation or drug expenses
  • Home renovation
  • Wealth management
  • Assisting grandchildren with education fees

What types of reverse mortgages are there?

Reverse mortgages are generally classified into public-sector and private sector loans.

Public-sector loans

Public-sector loans are offered by the government and often must be used for specific purposes, such as paying for a home repair. The two types of public-sector loans include:

  • Single-purpose reverse mortgages. Offering the lowest cost structure, these mortgages are generally for low-income earners that need the funds for a specific purpose.
  • HECMs. Home equity conversion mortgages are guaranteed through the HUD and can be used for any purpose. HECMs are generally suitable for properties valued at less than $400,000.

Private-sector loans

Provided by banks and mortgage companies, private-sector loans can be used for any purpose. This type of mortgage is offered as a proprietary loan, which generally offers larger property value limits but can be more expensive compared with public-sector loans.

How much am I eligible for?

How much you might get with a reverse mortgage ultimately depends on your property’s value and your age. Generally, you’re eligible for a larger loan amount the older you are and the more your property is worth.

Are reverse mortgages risky?

Yes, if you don’t understand what you’re getting into. Regulatory bodies like the US Federal Housing Administration (FHA) and Housing and Urban Development (HUD) review the structure and terms of reverse mortgages to ensure they meet industry standards.

Industry regulation ensures that HECM mortgages are a nonrecourse loan, which means that you can’t be held accountable for repayment of any part of the debt. If the sale proceeds do not cover the debt when the property is sold, the outstanding balance due is waived.

HUD guarantees that your funds aren’t at risk.

What are the costs?

The costs associated with reverse mortgages can be expensive compared with standard mortgage types. Major costs of reverse mortgages include:

  • Origination fee. This is the upfront fee charged by the lender to enter into the loan. For HECMs, the origination fee is 2% of the maximum loan amount up to $200,000.
  • Mortgage insurance premium. HUD requires all borrowers to take out insurance as a precautionary measure to ensure that you never owe more than the value of your property.
  • Appraisal fee. You’ll need an independent estimate of the value of your property. Appraisal fees depend on the pricing structure of the independent expert.
  • Servicing fee. This fee covers the administrative cost of maintaining the loan, such as issuing account statements.

Are reverse mortgage proceeds classified as income?

No. The IRS does not classify reverse mortgage proceeds as income, and proceeds are not subject to income tax. The proceeds also have no impact on your Social Security or Medicare — another perk for retirees.

Do I qualify for a reverse mortgage?

Generally, to qualify for a reverse mortgage in the US, you must satisfy general criteria:

  • The youngest borrower must be at least 62 years old.
  • You must own the property or purchase the property as your primary residence.
  • The property must comply with FHA appraisal guidelines.
  • You must have a sufficient amount of equity.

Who is a reverse mortgage suited to?

A reverse mortgage is suited to seniors ages 62 and older who intend to remain in their property throughout their retirement and are looking for additional cash flow.

Can I change my mind?

Yes. The rescission period is three business days from when you sign the loan documents. This gives you the flexibility to change your mind after reviewing the paperwork.

What happens if a borrower passes away?

If one borrower passes away, the loan isn’t payable until the surviving borrower moves out of the property or dies.

If both borrowers die, the loan balance is repaid and any remaining equity goes to the borrowers’ heirs.

Bottom line

A reverse mortgage is an unconventional option for seniors looking to cash in on their home’s equity without relinquishing ownership of their property. But you’ll want to understand your responsibility to avoid inadvertently losing your home or eating into an inheritance you’re hoping to pass along to your family.

Frequently asked questions

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2 Responses

  1. Default Gravatar
    AndrewNovember 9, 2018

    I have a reverse I want to refi and add $35000, my house is 1989 built and worth $220000 after the pool I think it will be worth $250000

    • finder Customer Care
      JoshuaNovember 21, 2018Staff

      Hi Andrew,

      Thanks for getting in touch with finder. I hope all is well with you. :)

      I understand you want to refinance your reverse mortgage and yes, this is possible. However, we don’t have a specific page that lists lenders who refinance reverse mortgage. Thankfully, we do have a page that list of lenders that allows you to refinance your mortgage. What you can do is check our table on this page to compare your options. From there, click on the “Go to site” green button to get in touch with your chosen lender. You can then ask them about refinancing your reverse mortgage.

      Moreover, you may also speak to a mortgage broker to learn discuss your available options.

      I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.

      Have a wonderful day!

      Cheers,
      Joshua

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