When you are looking to buy a home, you need to explore your options for paying for it. One of the best things available to you is a mortgage, which is a traditional way to get extra funds to pay it down. However, a reverse mortgage is another option you might want to consider if you already own your home. It allows you to withdraw a certain amount of the equity available in your home. There are seven key facts to know about how a reverse mortgage works.
Consumer Protections are in Place
One thing to know about reverse mortgages is that Home Equity Conversion Mortgages (HECMs) have certain consumer protections in place. They are regulated by the government and are operated under the same guidelines. This ensures that as long as a borrower uses a lender to obtain their reverse mortgage under the Federal Housing Administration (FHA), they have consumer protections per the government.
There are Different Types of Reverse Mortgages
In addition to HECMs, there are two other types of reverse mortgages from which you can choose. A single purpose reverse mortgage is offered by local, state or nonprofits and is required to be used for a purpose related to the state in which you live. A proprietary reverse mortgage is the type that is not insured by the government. It is available to homeowners whose homes have an appraisal that is high in value.
Reverse Mortgage Eligibility
Not everyone is eligible for a reverse mortgage. As a homeowner, it’s important to know whether or even how you can qualify. First and foremost, you must be at least 62 years old to be eligible for a reverse mortgage. You must also own your home outright or at least have a lien that you can potentially borrow against, and any mortgages you have already had on your home must be paid off using funds from a reverse mortgage. Additionally, you must live in the home in question as your primary residence and be current on all taxes related to the property, homeowner’s association fees and homeowner’s insurance. The property must also be kept in good condition and it can be a single family or property with up to four units.
Usage of Funds
A reverse mortgage cannot be used for leisurely activities. Instead, you are required to use the funds from it toward important things like supplementing your monthly income, paying off loans or another mortgage or making home improvements.
Variety of Options
With a reverse mortgage, you and your family have a variety of options. If you pass away or decide to move out of your home, there are certain things you can do to pay off the reverse mortgage. One option is to put the home up for sale and use the proceeds to pay the balance toward the loan with the rest of the funds being yours.
If you and/or your spouse pass away, your heirs can buy the home to live in, keep within your family or retain while its value increases. In this situation, they would have to pay the balance of the loan or 95 percent of the home’s appraised worth — generally, it’s whatever amount is less.
The other option is to simply sign over the home’s deed to the reverse mortgage lender if you decide you no longer want it.
Cheaper than Other Loans
Reverse mortgages tend to be cheaper than other home equity loans, which can include a variety of fees. With a reverse mortgage, you are required to pay an upfront amount as insurance. That amount essentially cements that you will receive funds on the loan and that when the payment is eventually due, you don’t have to pay back more than the home’s value. You also do not have to pay monthly payments to the lender when you get a reverse mortgage.
Five Payout Options
A reverse mortgage gives you five payout options for receiving the funds: line of credit, lump sum, term, modified term, tenure and modified tenure. It’s important to explore these options and determine which one is most appropriate for you once you need the funds.
If you own a home and meet the eligibility requirements, you may want to take out a reverse mortgage.
