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Reverse Mortgages Finder
This unconventional mortgage option allows seniors to get rid of their mortgage payments — but there are risks.
With a reverse mortgage, you can receive payments instead of making them — while still keeping ownership of your home. But be aware of the costs and potential risks.
How do reverse mortgages work?
If you’re 62 or older, a reverse mortgage allows you to supplement your retirement income. It’s called a reverse mortgage because instead of making monthly payments to the lender, you receive payments from the lender — it’s the opposite of a regular mortgage. The loan only becomes due when the term ends or you pass away or sell the home.
Qualifying for a reverse mortgage
To get a reverse mortgage, you must satisfy these general criteria:
- The youngest borrower must be at least 62 years old.
- You must own the property and it must be fully or nearly paid off.
- The home must be a primary residence (for HECM loans).
Reverse mortgages come in many flavors
There are four types of reverse mortgages. Depending on the type, you can get a lump sum payment, monthly payments, a line of credit or even a combination of all three. Each type of reverse mortgage has uses and risks.
Here’s a closer look at the four main types.
The 4 types of reverse mortgages
1. Standard Home Equity Conversion Mortgages (HECM)
HECMs are the most popular type of reverse mortgage. They’re popular because they can be used for any purpose and are backed by the government (FHA and HUD). This backing means that even if the lender defaults, you’ll still get your payments.
- Pros: HECMs have a limit of $822,375 and can be used for any purpose. HECMs are available as a lump sum, a monthly payment, a line of credit or a combination of all three. But unless you’re getting a lump sum only, you must accept a variable interest rate.
- Cons: While HECMs are federally insured, they’re not risk-free. You must still pay your home insurance payments and taxes or you could lose the home.
There’s also a HECM for purchase reverse mortgage. This option lets you buy a new home — perhaps one that’s smaller or closer to family — while receiving a reverse mortgage at the same time.
With HECMs, choose from either term or tenure payments. Term payments are made for a fixed amount of time. Tenure payments are made for as long as the borrower lives in the home.
2. Single-purpose reverse mortgage
As the name suggests, the funds from a single-purpose reverse mortgage can only be used for specific purposes, such as paying property taxes or for renovations. These loans are typically issued by state and local governments or nonprofits.
- Pros: Because they come in smaller amounts, the costs of obtaining this type of loan is lower than other reverse mortgages.
- Cons: Can only be used for specific purposes that must be approved by the lender.
3. Proprietary (Jumbo) reverse mortgage
This loan type is designed for owners of high-value properties who want to borrow more than the HECM limit of $822,375.
- Pros: Because they’re provided by banks and mortgage companies, private-sector loans can be used for any purpose and don’t require mortgage insurance.
- Cons: Unlike HECMs, which offer different types of payments, proprietary mortgages are only available as a lump sum payment.
4. Hybrid reverse mortgage
This is a new type of reverse mortgage that combines the features of a traditional and reverse mortgage into one. It allows eligible homeowners 60 years and up to refinance their current mortgage and reduce monthly payments for 10 years. After the 10-year period is up, monthly mortgage payments are eliminated.
- Pros: Lets you refinance your existing mortgage for lower payments.
- Cons: You must make payments for 10 years until payments drop off.
All reverse mortgages carry risk
If you’re considering a reverse mortgage, keep in mind that all reverse mortgages carry risk, even government-backed HECMs. You must continue to make your home’s insurance and tax payments or you could risk losing your home.
There have been reports of foreclosed homes after homeowners were accidentally late on insurance payments and seniors who were kicked out of their homes after their spouse died. Over 100,000 reverse mortgages have failed since the Great Recession, according to a 2019 report by USA Today.
If you’re considering a reverse mortgage, you’ll need to undergo reverse mortgage counseling with an approved agency. It’s also a smart idea to have a lawyer review your contract for any hidden clauses that could put your home at risk.
How life events impact a reverse mortgage loan
Several life events may impact when your reverse mortgage loan is due to be repaid.
- Borrower death. If the borrower passes away, the loan balance must be repaid and any remaining equity goes to the borrowers’ heirs.
- Hospitalization. If the borrower lands in the hospital for several months, the lender may be able to foreclose on the house because it’s unoccupied.
- Assisted living. If the borrower needs to move into an assisted living facility, the house must be sold and the loan repaid from the sale.
Costs and fees
Reverse mortgages are generally more expensive than traditional home loans. Costs can include:
- Application fee. Some lenders may charge a fee to apply.
- Origination fee. Origination fees vary by lender but can’t exceed $6,000.
- Reverse mortgage counseling. To get a reverse mortgage, you’ll need to attend counseling with a HUD-approved reverse mortgage counselor.
- Other closing costs. You’ll need to pay closing costs associated with a traditional home loan, like appraisal, mortgage, inspection and credit check fees.
- Mortgage insurance premium. HUD requires HECM borrowers to take out insurance as a precaution.
When choosing a reverse mortgage lender, look out for hidden fees and excessive charges. The Consumer Finance Protection Bureau (CFPB) has taken action in the past against unscrupulous lenders.
Choosing a reverse mortgage lender
Compare lenders based on:
- Rates. You’ll be charged interest on any payments you receive from a lender. The lower your interest rate, the slower your equity will decline.
- Closing costs. Compare all closing costs, paying special attention to the origination fee, which tends to be one of the priciest fees.
- Trustworthiness. Some reverse mortgage lenders have foreclosed on homes as soon as one homeowner’s insurance payment is late. Research lenders to find out if they’ve been sued by the government for unfair mortgage practices.
- Online reviews. Check both professional reviews and customer reviews on sites like the Better Business Bureau (BBB) and Trustpilot to learn more about customer experiences.
Select See rates to provide the company with basic property and financial details for personalized rates.
Credit score requirements
Because you don’t make payments on a reverse mortgage, lenders generally require a minimum credit score. But a lender may still check your credit to ensure you don’t have other debts that would impact your ability to pay homeowner’s insurance and taxes on time. And a history of delinquent payments can decrease your chances of being approved.
How to apply
Applying for a reverse mortgage is a little different than a traditional mortgage. You must attend reverse mortgage counseling with an approved agency, then submit a signed certificate before applying. Here are the steps involved.
- Attend counseling. Undergo reverse mortgage counseling and submit a signed Certificate of HECM Counseling. To find a counselor, call 800-569-4287 or search the HECM Counselor Roster online.
- Compare lenders. Compare reverse mortgage lenders by reading online reviews and researching costs and fees.
- Submit an application. The application process will vary by lender but will generally involve applying online, over the phone or in person.
- Get an appraisal. An appraisal is required to determine your home’s value to get a reverse mortgage.
- Submit supporting documents. This may include appraisal and inspection documents, bank statements, tax returns and more.
- Close the loan. Depending on the lender, you may need to sign the loan documents in person.
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.
If you still owe on your home and want to refinance to lower your payment, or if you’re looking to downsize, compare other mortgage options.
Frequently asked questions
How do reverse mortgages affect my income?
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.
What happens to my government assistance if I get a reverse mortgage?
A reverse mortgage doesn’t affect regular government benefits if the proceeds are used immediately. However, any funds that you hold onto count as an asset and could affect eligibility.
What is a repair rider?
A repair rider is an agreement to complete specific repairs required for your property to meet lending standards. These repairs must be completed in a time frame you and the lender agree upon to remain eligible for the reverse mortgage.
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