The first reverse mortgage was created to assist a widow who had lost her husband’s income stay in her property. Reverse mortgages still support people in staying in their homes today.
A reverse mortgage is essentially a loan, and it has developed over time to become one of the safest mortgage products available today. Thousands of seniors have already benefited from the advantages of this financial tool, which is backed by federal insurance.
Continue reading to find out more about reverse mortgages and how they can improve your quality of life.
As you approach retirement, you might start considering the different ways you can increase your retirement income. A fixed income from sources like social security and pensions is frequently substituted for one’s growing income upon retirement, which signifies the end of standard labour duties. And given that home equity can account for up to 50% of older Americans’ net worth, you might start to get more and more curious about reverse mortgage loans and how to use them as a tool for financial planning.
The Reverse Mortgage Meaning/Definition
The American Association of Retired Persons (AARP) defines a reverse mortgage as:
“A loan against your home that you do not have to pay back for as long as you live there.”
This is only accurate as long as you honour the loan conditions. A reverse mortgage loan may be a practical option that offers additional financial stability for retirees who are “equity-rich” and desire to age in place.
Advantages and Features
There are a number of unique features associated with a reverse mortgage loan that have made it a popular option for seniors age 62 and over.
- It can help you turn a portion of the equity of your home into cash.
- A Home Equity Conversion Mortgage (HECM) reverse mortgage loan is backed by the Federal Housing Administration (FHA).
- Allows you to age in place — you do not have to move out of your home.
- No monthly mortgage payment—loan must be repaid when the last remaining borrower leaves the home or does not comply with the loan terms. Borrowers are responsible for paying property taxes, homeowner’s insurance, and for home maintenance.
- You continue to own your home, subject to a lien by the lender, the same as with any other mortgage.
- You cannot lose your home as long as you continue to:
- Stay current with your property taxes.
- Continue to pay your homeowners insurance.
- Comply with all loan terms.
How Reverse Mortgages Work
Reverse mortgage loans operate by taking a piece of the equity in your house and turning it into cash that you may use anyway you like. These loans are different from conventional home equity loans in that you would normally pay back a traditional loan over time with monthly mortgage payments. On the other hand, when a reverse mortgage matures, the entire debt is paid back at once. Without making a mortgage payment each month, you keep your home and continue to live in it. Property taxes, homeowner’s insurance, and home upkeep are the borrower’s responsibilities.
The loan becomes due and payable when a maturity event occurs. These events happen if the last remaining borrower:
- Sells or transfers the home.
- Passes away.
- Does not maintain the home with basic repairs.
- Fails to pay taxes, insurance, and other home obligations.
- Stops occupying the home as their primary residence or leaves the home for more than 12 consecutive months.
- Defaults under loan terms.
The obligation to repay the debt in full falls to the borrowers or the estate in the case of any of these occurrences. To accomplish this, the house is typically sold, with the selling earnings used to pay off the loan. Any money that is left over is given to the borrower or their heirs. After a maturity event, you can choose to repay the loan with other money or by refinancing it into a conventional mortgage if you or your heirs want to keep the house.
Depending on the borrower’s preferences, there are various methods that reverse mortgage loan funds might be disbursed. You can change your disbursement type through your servicer for a fee if you decide on one kind and subsequently decide that another type would be more appropriate. But first, the following methods of payment are available to borrowers:
- A Lump Sum:
If a lump sum distribution is chosen, the monies are given to the borrower at closing. There is a withdrawal cap in the first year of the loan as additional consumer protection. This indicates that the withdrawal amount is capped at 60% of the principal limit during the first twelve months. You may borrow the necessary amount plus an additional 10% of the principal if other required payments (such as a current mortgage) consume more than 60% of the initial principal limit.
- A Line Of Credit:
Lines of credit are a common method of payment. The credit line is always active and accessible for withdrawals. Only the amount that has been used will be subject to interest. However, borrowers should be aware that if the credit line is fully repaid, the account will close and they will need to apply for a new reverse mortgage loan in order to access the money once more.
- A Monthly Payment:
This option disburses your funds in a fixed monthly payment that lasts the duration of the loan or for a predetermined period of time. The monthly payment is typically calculated depending on your age, the value of your property, and the interest rate. It stays the same unless you submit a written request for a payment plan modification.
- Or A Combination Of Any Of The Above Options:
A partial lump-sum with a monthly payment or a monthly payment with a line of credit are just two options available to borrowers.
Reverse Mortgage Loan Uses
Borrowers of reverse mortgages have put their money to a variety of uses. The loan proceeds may be used for anything you wanted, with a few exceptions including restrictions on utilising cash for estate planning service providers and specific annuities or insurance products. The following are the most typical uses of reverse mortgage funds:
- Paying off an existing mortgage (required as part of the loan)
- Reducing everyday bills
- Affording medical expenses or in-home care
- Repairing the home
- Setting it aside for potential emergencies
The reverse mortgage loan will first pay off any existing mortgages for borrowers as part of the loan. If so, this can be one of the loan’s most advantageous features for you. Relief from this expense may greatly increase your ability to save money each month and deploy it in ways that would improve your retirement lifestyle, as housing expenses typically account for roughly 30% of an individual’s income.
Another item that can reduce your income is credit card debt. The high interest rates on the card are frequently the majority of minimum payments, with hardly any principal being touched. Therefore, when these monthly minimum payments continue to deduct a portion of one’s income each month, it can be challenging. Credit card debt can frequently be reduced or eliminated with the help of reverse mortgage funds, freeing up income for other expenses.
Reverse mortgage loans are becoming more and more popular among financial planners as a strategic financial planning tool. In order to delay taking social security benefits and use loan earnings instead, borrowers can increase their benefits later in life. You could also use a reverse mortgage line of credit rather than taking money out of your investment accounts. This tactic gives money more time to grow or can be used during recessions to give investments time to rebound. Many seniors are discovering that these strategies enable them to stretch their retirement funds further in both cases. To find out more about these retirement strategies, talk to your advisor.
As an alternative to entering a nursing home, paying for in-home care is another clever way to spend reverse mortgage cash. If you’re like the majority of elderly citizens, you might feel better at ease ageing at home rather than in a facility. Fortunately, even if you discover that you require nursing care, you can still do so with a reverse mortgage.
The payment of medical bills or other costs associated with one’s health is another significant usage of reverse mortgage cash. Reverse mortgage funds can assist you in paying for necessary medical procedures, medications, or diagnostic tests. You can use loan money to ensure that your health is your top priority and is not put at risk because of financial constraints.
Types of Reverse Mortgages
The Home Equity Conversion Mortgages (HECM), which are insured by the government and account for 90% of all reverse mortgage loans in the US, are just one of several types available. The following are some of them.
- HECM for Purchase
Used when you want to buy a new home and get a reverse mortgage at the same time.
- Reverse Mortgage Refinance
Used when you want to refinance an existing reverse mortgage.
- Single-Purpose Reverse Mortgage
Use if you only want to use reverse mortgage proceeds for one expense. These are smaller loans and generally less expensive.
- Proprietary Reverse Mortgage
Typically used for high-valued properties.
Reverse Mortgage Loan Safeguards
Understandably, many consumers who are considering loans worry about their financial security. Fortunately, the U.S. Department of Housing and Urban Development (HUD) prioritises consumer safety with the HECM reverse mortgage. HUD protects the loan product and keeps enhancing consumer safeguards as the lending environment shifts. Such measures consist of:
- Limitations on Lender Fees
Origination fees are capped and regulated by the federal government.
- Reverse Mortgage Counseling
Before submitting a loan application, HUD mandates mandatory counselling sessions with a neutral third party FHA-approved counselling service for all prospective borrowers. You will learn more about reverse mortgages throughout the event, as well as about other available financial solutions.
- Financial Assessment for Borrowers
To reduce the risk of default, lenders conduct a financial evaluation to determine your capacity to meet the aforementioned loan commitments.
- FHA Reverse Mortgage Loan Insurance
You are never allowed to owe more than the value of your home. FHA insurance will pay the difference to the lender on your behalf if your loan exceeds the value of the home.
- Non-Recourse Loan Protection
The home is a security for the loan, but no other assets may be used to pay off the debt. Your other assets are thus safeguarded.
- No Pre-Payment Penalties
You won’t pay any extra fees if you decide to pay back your loan early. Both partial and full payments are covered by this.
Loans secured by reverse mortgages have proven to be a useful financial resource for retirement planning. This loan has the potential to offer you a sensible option for supplemental retirement income when used wisely. Call 1-888-998-3147 to speak with a qualified reverse mortgage professional if you’d like to learn more about this flexible loan.
- “Frequently Asked Questions about HUD’s Reverse Mortgages.” HUD.gov. U.S. Department of Housing and Urban Development. ND. Web. 31 August 2015. http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/rmtopten
- “How Recent Changes in Reverse Mortgages Impact Older Homeowners.” AARP.org. AARP. ND. Web. 31 August 2015. http://assets.aarp.org/rgcenter/ppi/ltc/fs211-economic.pdf
- Lim, Alberta. “Understanding 4 Key Reverse Mortgage Loan Features.” SeniorLiving.com. NP. ND. Web. 10 September 2015. https://www.seniorliving.com/article/understanding-4-key-reverse-mortgage-loan-features
- “Mortgagee Letter 2014-22: HECM Financial Assessment and Property Charge Requirements.” HUD.gov. U.S. Department of Housing and Urban Development. 10 November 2014. Web. 31 August 2015. http://portal.hud.gov/hudportal/documents/huddoc?id=14-22ml.pdf
- “Reverse Mortgage Loans: Borrowing Against Your Home.” AARP.com. AARP. ND. Web. 10 September 2015.