What is a Reverse Mortgage? How does it Work?

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  • A reverse mortgage is available for homeowners aged 62 and older who wish to tap into their home’s equity.
  • Based on the equity in your home, the lender will pay you money.
  • You can receive reverse mortgage payments as a lump sum, monthly payments, or a line credit.

A reverse mortgage may be available to you if you are over 62 years old.

You will need sufficient equity in your home to get a reverse loan. You will also have to weigh the property. pros and consIt is not a good idea to tap into that equity since you will need to repay the loan once your home is sold. If you plan to leave your home to your heirs after your death, a reverse mortgage is probably not a good idea.

Reverse mortgages can be very useful for some borrowers because they have the option to take money out their house and use it as a supplement to their income.

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What is a Reverse Mortgage?

A reverse mortgage is a home loan that is available to people who are 62 years old or older. This type of loan is for those who have accumulated equity in their home since the original purchase and have likely paid off their mortgage.

A Forward mortgage — which you probably think of as a regular mortgage — is a type of loan you’d use to buy a home. You pay monthly payments to the lender until your home is paid off. your debt decreases.

A Reverse mortgageThe loan is only available after you have purchased the house. The money comes from the equity that you have in your home. Your debt will increase over time.

A reverse mortgage is not the exact same as a mortgage. home equity loan or a home equity line of credit. Each of these tools can be used to tap into your home equity. However, they work in different ways.

Reverse mortgages offer many options for when and how you can receive your money. With a reverse mortgage, you have many options. home equity loanYou have no other choice than to receive the money in one lump sum. A HELOCThis is a line-of credit that allows you to withdraw money as necessary. You make monthly payments with a HELOC and home equity, but not monthly payments to repay reverse mortgages. Instead, you can sell your home to make the lender’s payments. 

Each of these three options comes with its own pros and cons. However, if you are younger than 62, you will want to choose a home equity or HELOC. They don’t have age restrictions, unlike reverse mortgages.

What is a reverse mortgage?

Reverse mortgages can be used to tap into all of your home equity. There are limits on the amount you can borrow. Your monthly payments should be higher if you are older and your home is worth more.

Reverse mortgage money is exempt from tax. The IRS views it as a loan and not as taxable income.

You have many options regarding when and how you want to receive the funds. 

  • Lump sumWhen you close your reverse mortgage, you will receive the entire amount. pay a fixed interest rate.
  • Monthly paymentsAs long as the borrower is still living in the home, you may receive equal monthly payments. If you choose to make monthly term payments, you will receive money every month for a certain number of years. Either way, you’ll pay an adjustable interest rate.
  • Line of creditInstead of receiving monthly payments, you can borrow money when you need it. You will pay an adjustable rate and only interest on the amount that you use from the credit line. You can also choose to combine equal monthly or term monthly payments with a credit line.

The proceeds of the sale of your home, whether you are still living or dead, go to the lender to repay your reverse mortgage debt. Any additional money earned from the sale will go directly to you, if alive, or to your estate, if deceased.

If your heirs would like to keep the property, they can pay off reverse mortgages themselves.

Who qualifies for a reverse mortgage?

To be eligible for a reverse mortgage, you must be at least 62 years old. If you are living in the same home as your spouse, you should be at least 60 years old. However, you have options for one spouse who is younger.

If you are the older spouse, you can be the sole borrower for the reverse mortgage. Your younger spouse could lose the house if you pass away first. Or, you may have to pay the mortgage off when you die in order to avoid the lender selling the home.

Depending on your situation, your spouse may be able to continue living in the home even after you pass away, but they would not receive the mortgage payments. If your spouse is younger than 62, talk to your lender or a Department of Housing and Urban Development counselor to discuss your options.

These are the 3 types of reverse mortgages

Conversion mortgage for home equity (HECM).

This is the most popular type of reverse mortgage. it’s backed by the government. Before closing, you must meet with a HUD counselor to discuss the process, pros and cons.

The loan amount is within HUD’s limits, which are $1,089.300 in 2023.

A HECM will cost you more upfront than other types of reverse mortgages. However, you can still use the money for any purpose.

Proprietary reverse mortgage

A propriety reverse mortgage, also known as a “jumbo reverse mortgage”, allows you to borrow more than the HUD limit. This could happen if your house is large and you have paid off the original loan or have a very low balance.

The government doesn’t back private reverse mortgages. Private lenders can help you get one. 

Reverse mortgage for one purpose

A single-purpose reverse mortgage allows you to use your funds only for one purpose. The lender may say that the money cannot go towards home repairs or property tax.

This type of reverse mortgage is the most affordable. It’s best for those with low-to moderate incomes or who haven’t built much equity in their home.

A single-purpose, reverse mortgage will be provided by a nonprofit organization or local or state government. 

What are the closing costs for a reverse mortgage?

Like a regular mortgage. you’ll have to pay closing costsReverse mortgage. You might be able to pay closing costs in monthly installments rather than paying them upfront. This payment method will result in less cash each month.

The following closing costs are possible to expect:

  • Mortgage insurance premiums:There is a closing cost of 2% and an annual MIP of 0.5%.
  • Origination fees:Your origination fees cannot exceed $6,000.
  • Real estate closing costs:Third parties will charge fees for services such as a home appraisal, home inspection and credit checks.

You should also keep in mind other fees. You will need to meet with a counselor from HUD before you can close on an HECM. You will also have to pay interest and servicing fees.

Beware of reverse mortgage scams

Scammers are often attracted to reverse mortgage borrowers. Fake lenders can come out of nowhere to offer you reverse mortgages that aren’t real. They also steal your money.

Unsolicited email or phone calls about reverse loans are not a good idea. Instead of responding to an unsolicited lender’s inquiry, do your own research and contact a lender.

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