Reverse Mortgages – The Basics Made Simple

By on January 3, 2017

Turn the value of your home into cash without having to choose between selling or taking out a home equity loan. It’s no wonder the reverse mortgage has become a top rated financial planning tool for retirees and cash-strapped homeowners. Before you run out and enter a reverse mortgage agreement, learn a bit more about how they work and what is expected of borrowers, then speak with a financial professional or trusted advisor for more about your specific situation.

What is a Reverse Mortgage?

A reverse mortgage is a loan available to people over t age of 62 which enables a borrower to convert part of the equity in their home into cash. The loan is reversed because the traditional mortgage payment stream is reversed – instead of making monthly payments to a lender, the lender makes scheduled payments to the borrower based on a percentage of accumulated home equity.

Retirees who own their home often use a reverse mortgage as a means of covering debts, paying for health and nursing care, paying for living expenses and even investment. There is no restriction on how a borrower may use their reverse mortgage. So as long as the borrower is living in the home, the borrower is not required to pay back the loan balance, but must remain current on their tax and insurance payments.

How does a reverse mortgage work?
A lender makes payments to the borrower based on a percentage of accumulated home equity.
Who is eligible?
Seniors age 62 and older who own your home outright or have a low mortgage balance that can be paid off with proceeds from the reverse loan.
How can the money from the loan be used?
For any reason. Often, seniors use the loan to supplement income, pay off debts, pay for health care expenses, cover nursing or in-home care.
When does the loan need to be repaid?
When the borrower dies, sells the home or permanently moves out.

With a reverse mortgage, you can never owe more than the value of your home, regardless of how much you borrow. And if the balance is less than the value of your home at the time of repayment, you or your heirs keep the difference.

How much can you get?

According to the National Reverse Mortgage Lenders Association (NRMLA), a borrower’s eligibility for certain amount of funds is based on a variety of factors, including

  • Age (Generally, the older you are and the more valuable your home, the more money).
  • Appraised value of home.
  • Current and expected Interest rates
  • Lending limit in your area (in some cases).

Types of Reverse Mortgages

There are a few different reverse mortgage products lenders can offer – consider each income vehicle and compare their benefits to your individual situation to learn more about what reverse mortgage can do for you.

Home Equity Conversion Mortgage (HECM)

An Home Equity Conversion Mortgage (HECM) is a reverse mortgage insured and regulated by the Federal Housing Administration (FHA) – part of the U.S. Department of Housing and Urban Development (HUD). Currently, HECMs make up 99% of the reverse mortgages offered in America.

An HECM is not a government loan, like Freddie Mac loans, but it is issued by a private lender that is under regulation by the FHA to follow certain procedures. The borrower pays an insurance fee upfront at the origination of the loan and each year the borrower is charged an annual insurance fee on the outstanding loan balance. Thus, the loan balance increases by the amount of this fee. The insurance purchased by this fee protects the borrower when the lender is unable to make a payment and if the value of the home depreciates to less than the loan balance – in which case, the FHA will pay off the remaining balance.

HECM Standard

Homeowners who need the most money available to them
The HECM Standard refers to a traditional loan in which the amount of money the borrower receives is based on a table created by HUD and is based upon your age, the current appraised value of your home and adjustable interest rates. Fees can include an origination fee, an upfront mortgage insurance premium (MIP), appraisal fees, closing costs and a servicing fee.

HECM Saver

Homeowners who don’t need as much money or Don’t want to pay the higher fees
HECM Saver is a low-cost version of the HECM Standard with discounts on a lower mortgage insurance premium (MIP). The MIP collected by the FHA is equal to 0.01% of the value of the home, rather than 2% on a HECM Standard. It is an excellent alternative to opening a home equity line of credit, because the fees are lower and no monthly payment is required,.

HECM for Purchase

Homeowners who need to downsize into a new home
The HECM to Purchase allows borrowers move into a new homes that better suit their needs – more navigable, closer to family, etc. – using funds from the sale of the old home combined with the reverse mortgage loan. When a senior buys a new home in conjunction with a reverse mortgage, the process leaves borrowers with no monthly mortgage payments.

Proprietary Reverse Mortgages

There are very few Proprietary Reverse Mortgages, however, it is important to touch upon them for homeowners with high property values. Proprietary Reverse Mortgages are not insured or regulated by the FHA. Lenders offer these “jumbo” reverse mortgages to seniors with $750,000 or more equity in their homes.

Check out our Reverse Mortgage Terms for explanations of financial terms and organizations involved in helping you leverage your home equity.

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FSN insurance and retirement journalist - Planning for your retirement or understanding your insurance needs can be confusing and difficulty. Scott knows these tasks can seem daunting. He offers his experience to make choosing insurance coverage and planning for your golden years a successful endeavor. Connect with Scott at !

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