Reverse Mortgages: What Are They and Should You Get One?

Did you buy your home by getting a mortgage loan that you’ve paid off in full? Are you looking for ways to supplement your retirement income, cover medical expenses, or cover some home repairs?

You might be able to borrow money against your home’s value. Here’s everything you need to know about reverse mortgages, including their eligibility requirements.

What Is a Reverse Mortgage?

A reverse mortgage is a type of loan available to homeowners aged 62 or older who have paid off their mortgage in full. It allows them to borrow money against their property’s value, that is, home equity.

That means that they don’t have to provide monthly payments to pay off your reverse mortgage the way a regular mortgage loan requires. Instead, you get payments from the lender in the form of a tax-free income.

You can choose to get fixed monthly payments, a line of credit, or a combination of both. You can also go with a lump sum payment if that suits your needs better.

How Does It Work?

When you apply for a reverse mortgage, your lender determines the loan’s principal limit based on age, home value, and current interest rates.

The older you are, the higher your home’s value, and the lower the current interest rates at the time of application, the higher your reverse mortgage principal limit will be.

That means you may be unable to borrow your property’s entire value, even if you own the home outright.

Now, just because you don’t have to provide monthly payments doesn’t mean you don’t have to pay your property taxes and homeowner’s insurance. You still need to proceed with those payments. The only difference is you don’t need to repay the loan until its maturity date.

A reverse mortgage must be paid in full if the borrower sells the home or moves out permanently or when they pass away.

Types of Reverse Mortgage Loans

There are three types of reverse mortgages:

• Home Equity Conversion Mortgage (HECM)

• Proprietary reverse mortgage

• Single-purpose reverse mortgage

HECM loans are issued and insured by the Federal Housing Administration (FHA) and are available only through FHA-approved lenders.

You can use a HECM loan for any purpose, even for buying a new home. There’s a HECM for Purchase loan that allows you to do it.

You must get HUD-approved housing counseling before getting a HECM loan. You also need to provide a higher down payment than with any other reverse mortgage loan.

Proprietary reverse mortgages are available through private lenders only. They usually offer larger loan advances, especially to homeowners with considerable home equity.

Single-purpose reverse mortgages are available through state and local government agencies and non-profit organizations. They cover a single purpose approved by the lender, such as the costs of home repairs or property taxes. As such, these loans are smaller and allow homeowners to access only a part of their home’s equity.

Who Can Get a Reverse Mortgage?

Any senior homeowner who is 62 or older, has paid off their mortgage and lives in the home as their primary residence is eligible to apply for a reverse mortgage. The house can’t be a rental property or a vacation home.

There is no minimum credit requirement, so you can get this loan even if you have a poor credit score. However, lenders will check for potential federal debt delinquencies. You must have no late payments on credit or property charges within the past two years to qualify for the loan.

If you plan on getting a HECM for a Purchase loan, improving your credit score is one of the best home-purchase budget tips anyone can give you. Your credit score won’t affect your mortgage, but it will play a part in the lenders' interest rates.

Should You Apply?

If you’re thinking about borrowing money against your home’s value, getting a reverse mortgage might be a good idea.

It doesn’t require monthly payments and offers flexible ways to get the money you need. Most importantly, it enables you to continue to own your home.

If your home’s equity increases over time and exceeds the balance of your reverse mortgage, it can provide you or your heirs with the remaining amount of equity.

Speaking of heirs, a non-borrowing spouse can continue living in the home after the borrower passes away. However, any other family members who inherit a home in a trust in California or any other state will have to pay off the loan or get another mortgage.

Take the time to learn more about these loans to understand all their requirements. Be sure to check the current rates and lending limits to evaluate your options and make an informed decision.

Conclusion

Reverse mortgages can be an excellent solution for senior homeowners looking to supplement their income or cover various living expenses. If you’re interested in applying, be sure to talk with a HUD-approved counselor to make an educated decision.

Would you ever get a reverse mortgage?