How Does a Reverse Mortgage Work, and Who Is It Good For?

Are you a homeowner? Are you 62 years of age or older? A reverse mortgage might be right for you. There’s a lot to learn about this process, so we’re here to help! Read on to how a reverse mortgage works and who would benefit from it. 

What is a Reverse Mortgage?

A reverse mortgage is a type of loan for homeowners who are 62 years or older. It allows them to borrow against their home’s equity for tax-free income (this can be done as a lump sum, fixed monthly payment, or line of credit). This loan is available to homeowners who have paid off their mortgage or have a considerable amount of home equity. 

Unlike a regular mortgage (the type used to buy a home), a reverse mortgage doesn’t require the homeowner to make any loan payments. Instead of the homeowner making payments to the lender, the lender will pay the homeowner. 

The entire loan balance will be due and payable when the homeowner/borrower dies, moves out of the home, or sells the home. Regulations make sure the loan amount doesn’t exceed the home’s value. 

When homeowners opt for a reverse mortgage, the title of the house will remain in their name. This is a big selling point. 

How Does a Reverse Mortgage Work?

With a reverse mortgage, throughout the loan’s life, the homeowner’s debt increases and home equity decreases. Here are the important ins and outs that you should know if you’re considering this loan.

While the home still belongs in the name of the homeowner during a reverse mortgage, the lender can request a repayment if the homeowner fails to maintain the property, keep the property insured, or pay its property taxes. 

The lender can also request a repayment if the owner declares bankruptcy, abandons the property, commits fraud, or if the house is condemned. If the homeowner adds a new owner to the property’s title, sublets all or part of the property, changes the property’s zoning classification, or takes out additional loans against the property. 

Interest Fees

Homeowners will only pay interest on the money received. That interest is combined with the loan balance. Nothing is paid upfront. This is one of the main advantages of a reverse mortgage. 

Amount That Can Be Borrowed

In many cases, homeowners can borrow the entire amount that their house is worth. However, some homeowners may not be able to borrow the entire value their home is worth, even if the mortgage is paid off. 

The exact amount that a homeowner can borrow (known as the principal limit) depends on the age of the youngest borrower, current interest rates, the HECM mortgage limit, and the property’s value.  

The older the borrower is, the more likely they will receive a higher principal limit. They’ll also probably get a higher loan amount if the property is worth more and the interest rate is low. 

It’s Not Free Money

At first, when you hear the definition of a reverse mortgage, it might sound like it’s just free money. That isn’t the case. It is a loan with interest and fees each month, which results in a rising loan balance. Plus, as the loan balance increases, your home equity decreases. 

When To Pay Back the Loan

Reverse mortgage loans are repaid either when the homeowner moves out of the home or when they die. In the case of death and the loan falls into the hands of the heir, they’ll typically sell the home to pay it back. 

There are a few outstanding situations where a homeowner may be forced to pay back the loan early. For example, if a homeowner fails to pay property taxes or homeowners insurance or doesn’t keep the home in good shape, the lender can move to collect on the loan.

You Can Change Your Mind

Choosing to opt for a reverse mortgage is a big decision. If you end up changing your mind, you have three business days after the loan closing to cancel the deal – without penalty. To cancel, you must notify the lender in writing. 

Who Is a Reverse Mortgage Good For?

Although a reverse mortgage might be ideal for some situations, it’s not best for all senior homeowners. A reverse mortgage is a good fit for:

• Homeowners 62 years and older who want to borrow against their home equity without having to make monthly payments
• Seniors who are short on funds for living expenses (especially during retirement)
• Those who want to diversify their sources of retirement income without having to worry about market downturns or outliving savings
• There are no plans to move out anytime soon
• There’s no chance of falling behind on property taxes, homeowners insurance, and home maintenance
• The home is just a financial asset (no one will be heartbroken if the home has to be sold to pay back the loan)

What Are the Different Types of Reverse Mortgages?

There are different types of reverse mortgages, each one fitting a different financial need.

1. Home Equity Conversion Mortgage (HECM) - This is the most common type of reverse mortgage. A HECM is a federally-insured mortgage, usually having higher upfront costs, but the funds can be used for any purpose and borrowers can choose how the money is withdrawn (line of credit, fixed monthly payments, etc.). HECMs are only offered by FHA (Federal Housing Administration) -approved lenders and all borrowers must receive HUD-approved counseling. 
2. Proprietary Reverse Mortgage - A private loan not backed by the government. Borrowers can typically receive a larger loan advance, especially with a higher-valued home. 
3. Single-Purpose Reverse Mortgage - These loans aren’t as common as the other options and are typically offered by nonprofit organizations or state/local government agencies. It’s generally the least expensive of the three options, but borrowers can only use the loan to cover one specific purpose that’s approved ahead of time. 

BlueWest Properties Is Here To Help

If you need help deciding if a reverse mortgage is right for you, BlueWest Properties is here to help! With years of real estate experience, our agents can walk you through all the details and provide our best recommendations based on your unique circumstances. To get started working with us, contact us online today.