Are you struggling to make ends meet in retirement? You’re not alone. With fixed incomes, rising healthcare costs, and higher-than-ever living expenses, many people are facing the same challenges.
So, what can you do to ease this burden? Many homeowners are looking for ways to access their home’s equity without selling or taking on more debt, and a reverse mortgage is a great way to do that.
But what exactly is a reverse mortgage, and how does it work? This guide will give you a clear overview of a reverse mortgage, what it’s for, and how to decide if it’s right for you. By the end, you’ll be ready to make a confident decision about your future.
What Is a Reverse Mortgage?
A reverse mortgage is a type of loan for homeowners aged 62 or over that literally acts in reverse, letting the borrower secure a loan using their home as collateral.
So, instead of paying back the lender in monthly payments (like with a normal mortgage), a reverse mortgage allows you to receive money from the lender.
You can use the money however you want, and as long as you live in the home, you don’t have to repay the loan. But if you move out for an extended period (e.g., to a nursing home for over 12 months), the loan may need to be repaid.
When you do move out permanently, sell the home, or pass away, the loan will need to be repaid – usually from the sale of the house.
If you decide to move but want to keep your home, you can pay back the loan yourself. Just keep in mind that interest adds up over time, so the amount you owe will grow.
How Does a Reverse Mortgage Work?
You can receive money from a reverse mortgage in several ways:
- Lump sum: A one-time payment
- Monthly payments: A steady income stream
- Line of credit: Withdraw funds as needed
- Combination: A mix of the above options
We know that a reverse mortgage doesn’t require repayment for as long as you continue to live in your home as your primary residence. But there are some other obligations that have to be met, and if you don’t meet them, the loan might become due. These include keeping up with:
- Property taxes
- Homeowners Insurance
- Maintenance costs
What Is the Non-recourse Rule?
In a reverse mortgage, if the loan balance (including interest) exceeds the value of the home, you (or your heirs) won’t have to pay the difference. The lender can’t take your personal savings or other assets to cover the rest of the loan balance. That’s the non-recourse rule.
When the house is sold, if there’s any money left after the loan is paid off , that remaining equity will go to you or your heirs.
The Different Types of Reverse Mortgages
When it comes to applying for a reverse mortgage, you’ve got some options. Here are the 3 main types of reverse mortgage loans:
Home Equity Conversion Mortgage (HECM)
This is the most common type. It’s available to homeowners aged 62 or older, can be used for any purpose, and it’s backed by the government (insured by the Federal Housing Administration, or FHA)!
The amount you can borrow on an HECM reverse mortgage loan depends on things like your age, your home’s value, and the interest rates involved.
Proprietary Reverse Mortgage
This is a private loan offered by banks or lenders – not the government – and it’s often a great option for people with higher-value homes. The loan limits can be higher than the HECM, but these loans usually come with higher fees and fewer options.
Single-purpose Reverse Mortgage
Unlike other types of reverse mortgages, a single-purpose reverse mortgage is designed to be used for something specific, like making home repairs or paying property taxes. They can be harder to come by – usually offered by non-profit organizations and some local or state government programs – and offer lower loan amounts. But if you’re a lower-income homeowner and need targeted financial support, this could be a cost-effective option for you.
Is a Reverse Mortgage Right for You?
The short answer: it depends on your personal needs and goals!
If you’re looking for extra income and plan to stay in your home long-term, a reverse mortgage can help you get the funds you need without making monthly payments, giving you more cash flow.
But, if you plan on leaving your home to your kids or grandkids, a reverse mortgage may not be the best fit. And remember, even without making mortgage payments, you’ll still need to stay on top of property taxes, insurance, and home maintenance. If you fall behind on any of these, the loan could come due.
How to Apply for a Reverse Mortgage
To apply for a reverse mortgage, follow these simple steps:
- Make sure you’re eligible: To qualify for a reverse mortgage, you need to be at least 62 years old, own a home that’s your primary residence, and have enough equity built up in your home to borrow from.
- Decide which reverse mortgage is right for you: From single-purpose to proprietary, lump sum payment to line of credit, decide which option best suits your current needs and long-term goals.
- Talk to a mortgage counselor: If you’re going for a HECM loan, you’ll have to meet with a HUD expert to make sure you’re making an informed decision.
- Choose a reverse mortgage lender: Look for a lender with a solid reputation, and feel free to shop around and compare rates, fees, and terms to get the best deal.
- Complete the application: This is where you’ll fill in details about your home, income, debts, and other financial information. You’ll also need to provide documents like your tax returns, proof of income, and proof of your home’s value. And speaking of value…
- Get your home appraised: The lender will order an appraisal to determine your home’s current market value and use it to decide how much you can borrow.
- Wait for approval: The lender will review your application and the appraisal report. If everything checks out, they’ll approve the loan.
Sign the loan agreement: Finally, to get a reverse mortgage, you’ll be given a loan agreement with all the terms. After reviewing, you can sign the agreement and complete the process.
Talk to an Expert at Brick City Title
A reverse mortgage is a great way for homeowners 62 and over to make the most of their home’s value – without selling. And when you’re ready to get a reverse mortgage, we’ll be here to help.
As a trusted title insurance agency, Brick City Title understands the unique needs of homeowners with reverse mortgages. With our team of experts in your corner, you can rest assured that your home and financial interests are fully protected.
Our title insurance services shield your ownership rights throughout the entire process, making sure there are no unexpected liens, disputes, or challenges that could complicate your reverse mortgage or future transactions. Book a call with us today.
