What are reverse mortgages?
A reverse mortgage, or Home Equity Conversion Mortgage (HECM), is a type of home loan available to homeowners 62 or older who have considerable equity (usually at least 50%) in their home. This financial tool can benefit people who need additional cash flow for other expenses, as the value of their home’s equity can be converted to cash, eliminating monthly mortgage payments. Borrowers use the equity in their home as security for the loan, and can recieve funds as monthly payments, a line of credit, or in a lump sum. This is called a "reverse" mortgage, because in contrast to a traditional mortgage, the lender makes the payments to the borrower.
Reverse mortgage quick view
- Available to homeowners 62 and older
- One-time FHA MI fee of 2% of the home’s value
- Borrow up to 80% of the home’s value
- Borrower must have sufficient equity to qualify
- Used for primary residence only
- No prepayment penalty
- Simple & secure online application
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How much money can you borrow?
The amount of money a borrower can get through a reverse mortgage is dependent on their age, the current reverse mortgage/HECM interest rates, their current mortgage balance if they have one, and what an independent appraiser determines as their home’s current value.
Most home lenders require the homeowner retain 20% equity in their home (this keeps the borrower from having to pay any sort of monthly private mortgage insurance). Home equity is the difference between what a homeowner owes in a mortgage compared to what their home is worth. If a home is worth $300,000 and they owe $150,000 on their mortgage, they would have $150,000 in home equity.
Key responsibilities of homeowners with a reverse mortgage
Homeowners with a reverse mortgage have three main responsibilities:
- The borrower must in the home as a primary residence
- The borrower must maintain the home in good condition
- Taxes, insurance and other home ownership cost must be paid
Pros of a reverse mortgage
It may be a good option for homeowners with limited income and a lot of equity in their house. They can use the equity to receive cash for expenses or other needs. The reverse mortgage could also be used to pay off their initial mortgage so they will no longer have to make monthly payments.
Cons of a reverse mortgage
The principal balance will increase over time as the interest and FHA MI fees accrue. Be aware that if a borrower isn’t using the home as a primary residence, it may result in the loan needing to be paid back sooner. If the borrower vacates the property for more than 12 months for medical reasons or six months for non-medical reasons, the balance of the loan will be due and the borrower will have to pay the loan balance.
What will a reverse mortgage cost?
Upfront, borrowers will pay an origination fee, closing costs, and an FHA MI fee of 2% of the home’s appraised value. Ongoing costs include an annual FHA MI of 0.5% of the outstanding loan balance. When the loan is due, the principal and interest are collected.
Will you still have to pay utilities and other bills?
Yes. The title of the home is in the borrower’s name, so they are responsible for property taxes, utilities, maintenance, and any other expenses. In fact, if you do not pay your property taxes, your lender may require you pay back your loan in full. Some lenders may set aside a portion of your loan each year to be used to pay taxes and insurance.
Do you lose your house with a reverse mortgage?
No, you do not sell a house to the mortgage company with a reverse mortgage. During and after the reverse mortgage, the home remains in the homeowner’s name. In this way it is similar to traditional forward mortgages.
Can you still leave your home to your heirs?
Yes, but they will have to pay back the loan balance before the title is free and clear. They could either refinance or otherwise pay the balance and keep the home or sell and use the proceeds from the sale of the house to pay the loan. If they sell the home, they will have to pay either the balance of the loan or 95% of the home’s appraised value (whichever is less).