Choosing The Right Type of Reverse Mortgage For Your Needs

If you are looking for additional income after your retirement, consider getting a reverse mortgage for your property. This is a popular option for many retirees with significant home equity and looking for extra funds to cover living expenses, medical bills, or other spending requirements.

What Is A Reverse Mortgage?

With a typical housing loan, you must make monthly payments to the lender until the loan balance is fully paid. A reverse mortgage works the other way around, with the lender paying you either in a lump sum or regular payouts as you convert your home equity into cash. 

This may be a confusing concept, but you can think of it as an advance payment for the eventual sale of your home. The amount of money you can get would be based on the value of your home, your age, and the interest rate of the loan, and you can use this money for any purpose, such as to pay a debt, cover living expenses, or support medical fees.  

One of the key benefits of a reverse mortgage is that you can continue to live in your home despite the property being mortgaged, which is ideal if you want to age in place after your retirement. Furthermore, you can only repay the principal or interest on your reverse mortgage once you sell your house, permanently move out, or pass away. A reverse mortgage is also a non-recourse consumer credit obligation, which means that your liability is limited to the proceeds of the sale of your home. 

But like any other loan, a reverse mortgage comes with risks and rewards, and you must be informed about all these to help you make intelligent choices about your home and finances. For one, it can have high fees and interest rates, and in some cases, your heirs may be responsible for repaying the loan if they want to keep the property in the future. Thus, you should carefully consider all options and fully understand how does a reverse mortgage work before signing any agreement.

How To Qualify For A Reverse Mortgage

To be eligible for a reverse mortgage, you must be 62 years old and above, own a property with sufficient equity, and have no pending or delinquent federal debt, including student loans, income taxes, HUD-insured loans, or small business administration loans. Any unpaid debts, such as an ongoing mortgage on your home or remaining balances on your federal loan, must be paid in full upon closing of the reverse mortgage. You can take the payment from your savings, but you can also use the proceeds from the reverse mortgage to settle these debts. 

Additionally, the mortgaged property must be your principal residence, and you must prove that you can financially support the essential expenses to keep your home. This includes payment for property taxes, homeowners insurance, and association fees. The house should also be in good condition and meet the required property standards, or the lender will inform you of the necessary repairs before they approve your application for a reverse mortgage.

Types Of Reverse Mortgage

There are three types of reverse mortgages, each with its own conditions and payment schemes. You can choose one based on your financial needs and situation:

1. Home Equity Conversion Mortgage (HECM)

The HECEM is federally insured, which means it is supported by the Department of Housing and Urban Development (HUD), the Federal agency in charge of national policy and programs in the US. It is the most popular type of reverse mortgage available because it does not have financial or medical requirements and no restrictions on the use of loan proceeds as well. However, it has a loan value limit and tends to be more expensive than traditional home loans because of high upfront fees.

Applying for HECM requires a consultation with a HUD-approved counselor who will explain the financial implications of getting this type of loan, the repayment process, eligibility requirements, and other alternatives that you could look into depending on your situation. You are expected to shoulder the costs of this consultation because the lender is not allowed to pay for it to ensure impartiality.

2. Single-Purpose Reverse Mortgage

If you want to avoid the high fees associated with HECM, go for a single-purpose reverse mortgage, the least expensive option out of all three types. It is offered and supported by local and state government agencies and non-profit organizations, so you can expect to pay less in fees and interest rates. 

However, it is also the least common type of reverse mortgage because it is only available in some states and has certain restrictions about the use of the funds. As implied by its name, the loan proceeds can only be used for a single purpose and is subject to the lender’s approval, such as payment for property taxes or to cover expenses for home repairs.  

3. Proprietary Reverse Mortgage

Ideal for homeowners who want to get more value out of their property, a proprietary reverse mortgage is supported by private institutions. This means that you may avail of this type of mortgage if your home value exceeds the lending limit for HECM, which is at $1,089,300 in 2023.

While this is not a standard requirement and does not apply to everyone, you may be required to undergo financial counseling when applying for a proprietary reverse mortgage. This purpose is to provide you with a comparison of the costs and benefits between this type of mortgage and a HECM. 

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