Considering A Reverse Mortgage?
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What is a reverse mortgage?
A Reverse Mortgage is a way for borrowers age 62 or older to unlock the equity in their home by turning it into tax-free cash without having to make any monthly mortgage payments. While loan proceeds are not taxable income, property taxes must be paid. Please consult a tax advisor.
What are the qualifications?
The borrower on title must be 62 years or older (a nonborrowing spouse may be under age 62)
The home must be the borrower’s primary residence
The borrower must own the home and meet the financial requirements of the HECM program
What are the borrower’s obligations? Borrowers must continue paying property taxes and homeowners insurance, maintain the home, live in the home, and otherwise comply with the loan terms.
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Types Of Reverse Mortgages
There are three main types of reverse mortgages. But how do they differ?
Home Equity Conversion Mortgage (HECM)
The most common type of reverse mortgage is the HECM. This type of reverse mortgage is insured by the Federal Housing Administration (FHA). The most you can borrow with one of these loans is $1,089,300 in 2023. If you must borrow more than that, you’ll need to apply for a jumbo reverse mortgage.
Single-Purpose Reverse Mortgage
A single-purpose reverse mortgage is typically less expensive than a HECM. But it also comes with limits. As the name suggests, you can only use the funds from this type of reverse mortgage for one purpose. Your lender might approve you for the loan but stipulate that you can only use the funds to cover home repairs, insurance premiums, or your property tax bills. Typically, these loans are offered by charities and local governments to homeowners with lower to moderate incomes who are struggling to pay their bills. They are not available everywhere.
Jumbo Reverse Mortgage
You will need to take out a jumbo reverse mortgage, also known as a proprietary reverse mortgage, for any amount more than $1,089,300 in 2023. Because a larger loan is considered riskier, your lender might charge you higher fees and a higher interest rate for a jumbo reverse mortgage. Unlike a HECM, this type of reverse mortgage is not insured by the FHA. That means it does not come with as many protections. It also doesn’t require a HUD-approved counseling session or financial assessment.
How Do You Pay Back A Reverse Mortgage?
How you pay back a reverse mortgage varies depending on two main factors:
If you have a HECM and sell your home: If owners decide to sell their home after taking out a reverse mortgage, they must use the proceeds from this sale to pay off their loan. If the home sells for less than what the owners owe on the loan, they won’t be responsible for making up the difference as long as they have a HECM.
If you have a HECM and pass away: Your reverse mortgage must be paid off if you pass away. In this case, your heirs can sell your home and use the proceeds to pay off the reverse mortgage. They can also give the home to your lender. If they want to keep your home, they’d have to purchase the home.
If you move out of the home: You must live in the home as your primary residence for more than half the year. If you move out of the home, the reverse mortgage will come due. You’ll need to pay back the loan even if you wish to keep the home. That could be done with your own funds or by refinancing the loan.
Reverse Mortgage Vs. Refinance: Which Is Better?
While a reverse mortgage can supplement your income as you age, this type of financial tool might not be your best choice. There are times when you might consider alternatives to a reverse mortgage, especially if you want to leave your home to your children after you die or if you plan on selling the property.
You might instead consider refinancing options for seniors and the different types of mortgage refinancing that could be a better alternative to a reverse mortgage.
A cash-out refinance is one such option. Most people refinance to lower their interest rate or shorten or lengthen the term of their existing mortgage loan. A cash-out refinance, though, can also provide you with a lump sum of cash that you can spend on anything.
In a cash-out refinance, you’ll refinance for an amount higher than what you owe on your mortgage. Say you owe $100,000 on your mortgage and your home is worth $200,000. You might refinance for $170,000. You then receive that extra $70,000 as a lump sum payment. You’ll have to repay the full $170,000 that you’ve borrowed in regular monthly payments with interest. But if you pay off your new mortgage loan before you die, you can leave your home to your heirs without worrying about forcing them to pay off a reverse mortgage to gain the property.