HOW DOES A REVERSE MORTGAGE WORK?

Before you apply for a reverse mortgage, it is important to know how reverse mortgage works and what you should expect.  

LET’S LEARN HOW REVERSE MORTGAGE WORKS:

A home with a traditional mortgage provides home equity over time as you pay down the loan. Home equity is the term used to refer to the difference between the value of your home, appraised value, and your debt from mortgage against the property.  

For example, if:

  • Worth of your home: $400,000 
  • Current mortgage balance: $40,000
  • Then, home equity: ($400,000 – $40,000) $360,000

For most American, this $360,000 home equity forms a substantial portion of their net worth, and as they reach retirement age, they want to use these funds to supplement their income source. 

There are several options to use your home equity, such a:

• Selling the house
• Borrowing a home equity loan
• Obtaining a HELOC (Home Equity Line of Credit) 

But these options are often unsuitable. Selling your home is not a sensible option, especially if you don’t want to leave your home. Home equity loan and HELOC may be difficult to obtain. 

Secure Your Future

Did you know that senior housing wealth reaches record $7.14 Trillon? 1
Learn how you can use a reverse mortgage for a better retirement.

This is when reverse mortgage steps in!

If you qualify for a reverse mortgage and the product suits your needs, a lender offers you fixed monthly payments or a line of credit according to the equity value of your home.

Flexible Reverse Mortgage Payment Options

The HECM program gives borrowers flexibility in the way they receive the proceeds of the reverse mortgage. 

This option transfers all funds on a reverse mortgage to the borrower at closing. This takes place when the borrower uses the HECM for Purchase program or to pay off a large existing property mortgage. 

You can access the line of credit only when you need funds. To access funds, borrowers have to submit a written request to the lender. An excellent feature of the line of credit is that unused funds grow over time, considering that you are one year older and your home appreciated in value. 

Term payment provides borrowers with a fixed monthly sum of money for a specific time period. For instance, if the borrower is 65 and wants to defer going on Social Security until age 70, s/he can establish term payments for five years. The borrower receives the same amount every month, even if the home’s value decreases. 

Under this option, the borrower receives fixed monthly payments for the duration he resides the home as a primary residence, even if the mortgage balance exceeds the home’s value. The payment only stops after borrower’s death or if s/he permanently leaves the house.

Rather than residing in the same home, the borrower can use the funds received on a reverse mortgage to buy a new house outright.  You can use funds received by selling your old property, gift money, savings, or other income sources that are combined with the amount received on a reverse mortgage. But with this option, you will not receive monthly mortgage payments. 

TYPES OF REVERSE MORTGAGES

Three types of reverse mortgages are:

The HECM is a federally insured reverse mortgage program backed by the U.S. Department of Housing and Urban Development. 

Features of HECM:

  • Borrowers with difficult financial situations have higher chances to qualify for a HECM than a proprietary reverse mortgage.
  • Borrowers should meet a HUD counselor before applying to understand benefits and costs and their options.
  • Borrowers can obtain larger advances at a lower total cost than proprietary reverse mortgages. It often involves large upfront costs

State and local governments and nonprofit organizations offer these programs:

Features of Single-purpose reverse mortgages:

• Lenders explain how you can use the reverse mortgage loan proceeds. You may use obtained funds to pay for property taxes, home repairs, or improvements. 
• Homeowners with low or moderate income have higher chances to qualify for this program.
• The fee is the lowest of all types of reverse mortgages.

These programs are backed by private lenders, and terms for the loan vary from lender to lender. 

Features of the proprietary reverse mortgage:

  • Easier to get approved for those who don’t qualify for the HECM.
  • Owner of high-value homes may borrow more than the loan amount limits set by the government on the HECM program.
  • You may borrow more equity than the HECM limits.
  • You can use funds in any desired way

HOW MUCH CAN YOU RECEIVE ON A REVERSE MORTGAGE?

The reverse mortgage amount you receive is based on several factors, including:

  • Youngest borrower’s age
  • Lesser of the home’s value or lending limit of the HUD
  • Current interest rates
  • Costs to borrow the loan
  • Existing mortgages and liens (Must be fully paid)
  • Remaining money that belongs to you or your heirs

Since the borrower doesn’t have to repay the loan at any ongoing interval, the interest accrues on the loan balance. The entire loan is paid back when the last borrower permanently leaves the primary home. The older you are, the more you will receive under reverse mortgage based on the HUD calculator. 

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¹ Senior Housing Wealth Reaches Record $7.14 Trillion. NRMLA. Historical RMMI.

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