Exploring Reverse Mortgages
Often referred to as a home retirement plan, a Reverse Mortgage is a type of home equity loan that allows you to convert some or all the existing equity in your home into cash while you retain ownership of the property. Equity is the current cash value of a home minus the current loan balance.
A reverse mortgage works much like a traditional mortgage, except in reverse. If the homeowner continues to live in the home, no repayment of principal, interest, or servicing fees is required but it is still the responsibility of the homeowner to pay property expenses such as taxes, insurance, and HOA. The funds received from a reverse mortgage may be used for anything, including housing expenses, vacation, investing, or even an emergency fund.
To qualify for a reverse mortgage, you must be at least 62, own your home, and have adequate equity (Usually 50%). You may choose to receive the reverse mortgage funds in a lump sum, monthly advances, as a line-of-credit, or a combination of the three, depending on the reverse mortgage program and lender. The amount of money you are eligible to borrow depends on your age, the amount of equity in your home, and the interest rate set by the lender.
Depending on the plan selected, a reverse mortgage is due with interest either when the homeowner permanently moves, sells the home, dies, or the end of a pre-selected loan term is reached. If the homeowner dies, the lender does not take ownership of the home. Instead, the heirs must pay off the loan, typically by refinancing the loan into a forward mortgage (if the heirs meet eligibility requirements) or by using the proceeds generated by the sale of the home.
Types of Reverse Mortgages
- FHA Home Equity Conversion Mortgage (HECM)
- Proprietary Reverse Mortgage
- Single-Purpose Reverse Mortgage
Reverse Mortgage Loan Requirements
- Must be 62 years or older
- Reverse mortgage counseling session
- Must own the home as a primary residence
- Must have enough equity - usually at least 50%
- Up to 4-unit property if the owner occupies one of the units
- Must continue to pay property expenses (I.E. taxes, insurance, HOA, etc.)
Exploring Reverse Mortgages
Reverse mortgages are great for seniors looking to minimize their monthly liabilities and supplement their income. Often referred to as a home retirement plan, reverse mortgages take the equity out from a homeowner's property and structure the payments as a monthly distribution, a lump sum to the homeowner, a line of credit, or a combination thereof.
Reverse Mortgage Loan Limits
For the FHA-insured HECM, the maximum loan limit is $970,800 as of January 1st, 2022. Technically there is not a set limit for non-insured reverse mortgages. Although there isn't an exact loan limit on the other reverse mortgage programs, there is a limit on how much you can borrow against the value of your home, or loan-to-value (LTV).