- Posted by: steve
- Category: mortgage articles, reverse mortgage
How do reverse mortgages work? This is a question that many people are asking. Read here to get the answers and information you’ve been looking for.
In 2016, the total loans for Home Equity Conversion Mortgages (HECMs) were 48,794 units. This figure was encouraging despite the negative outlook for reverse mortgage endorsements in 2016.
Compared to 2015’s volume, 2016’s figure was down by 13.5 percent. This impact was as a result of changes that had been made to the program.
For the older Americans, using reverse mortgages is one of the ways of getting financial security. Typically, it allows you to withdraw some equity from your house.
You can use reverse mortgages to make home renovations, meet medical expenses, or supplement your social security.
Sadly, many people tend to ask the question: how do reverse mortgages work? If you’re in that group of individuals, here’s a straightforward explanation.
Ready? Let’s go.
What is a reserve mortgage?
A reverse mortgage is a special kind of home loan that allows you to convert part of your home equity into cash. For all the years that you pay mortgage payments, you accumulate equity that you can use to get cash for just about any financial need.
Unlike the traditional mortgage, this mortgage gives you monthly payments, and it’s only repayable if you fail to meet its obligations, move out of the house permanently, sell the home, or die. When you use this mortgage, you can either get fixed monthly payments or a line of credit.
In the U.S, this type of mortgage is only available to the older people who are aged 62 years and above. The Federal Housing Administration (FHA) is liable for issuing the HECM loan.
How do reverse mortgages work?
As you already know, you need to be aged 62 years and above to be eligible for this loan. Typically, that is the first essential requirement you need to meet. You also need to own a home.
For most people, getting a regular mortgage is one of the convenient ways to buy a home. This means that you borrow money from a lender and pay down the balance through monthly payments.
Over time, this helps you to build equity in your home. This means your debt decreases while you home equity increases. After fully settling the debt, you get full equity, plus you own the home.
So, if you have equity in your house and you need cash, you can use the equity to get the money while still staying in your home.
Typically, the cash you get is based on a percentage of your home value. With this mortgage, you must keep the title to your home as it acts as security. The loan offers fixed and variable interests, which are charged depending on the proceeds you get.
As the life of the loan advances, your debt increases and your home equity reduces. Should you sell the home, move out or die, the lender sells the home to recover the money that you were given.
If your home has any remaining equity, they are transferred to you or your heir.
What types of reverse mortgages are available?
For a comprehensive answer to the question “How do reverse mortgages work?” it is important to understand the available types too.
1. Home equity conversion mortgages
These are also known as HECMs, and they are the popular types that many older people are using. The FHA insures these mortgages, but the money comes from private lenders. Before you get an HECM, you first get a borrower counseling.
The drawback with this choice is that the maximum loan amount is limited.
2. Single-purpose reverse mortgages
Single-purpose option is different from an HECM because the lender specifies what you can use the money for, such as home renovations or home repairs. For these loans, you only get them through non-profit organizations and some local or state governments.
This mortgage is the inexpensive option, but you can’t get them everywhere. It can be a good option for you if you have low or moderate income.
3. Proprietary reverse mortgages
These are private mortgages that are financed by the companies that provide them. If your home is high-valued, a proprietary reverse mortgage can be a good option for getting a bigger loan. This mortgage is great if you have a high-value home with a small mortgage.
4. Purchase reverse mortgages
The Home Equity Conversion Mortgage (HECM) for Purchase is a particularly useful mortgage option here in Florida. If you are over 62 years of age and are looking to purchase a home in Florida while also retaining a significant amount of your hard earned capital, you need to look into this option. You can get a free purchase reverse mortgage quote for free right here.
How to get a reverse mortgage
How do reverse mortgages work when it comes to getting a loan?
Now, at this point, you are ready to find a mortgage that suits your needs. For many people, an HECM loan is the option to start with since it has no income limitations and you can spend the money how you want.
Non-HECM options are usually not insured, and their costs can be quite expensive for some people. But, they usually give higher amounts than HECM loans, and that sets them apart.
To get a reverse mortgage, you must understand the requirements, which include:
- Must be 62 years and older
- Own a home
- Have a low mortgage balance
- Free of any federal debt
- Be stable to make full and timely payments
- Undergo a HUD counseling
Some lenders expect all borrowers to be capable of meeting financial obligations such as insurance and property taxes. The lender will review your monthly living expenses, credit history, assets, and income when you apply for the loan.
Additionally, the mortgages only accept specific homes:
- Single family or two-to-four unit homes
- HUD-approved condominiums or townhouses
- Manufactured homes that meet FHA requirements
How much can you get?
The amount you will get through a reverse mortgage depends on several factors including:
- Current interest rates
- Home’s value
- Type of mortgage
As of 2017, the FHA has placed a limit of $625,500 on HECM loans. However, for non-HECM loans, you can qualify for any amount that you need as long as you meet the requirements
To receive the money, you have several options, including:
- Requesting a lump-sum amount
- Getting fixed monthly payments for a preferred period
- Getting fixed monthly payments for the entire time you are in the home
- A line of credit
This is a vital part to cover when responding the question: How do reverse mortgages work?
Are there any fees?
Like other mortgage programs, here are several fees you should be ready to pay when applying for a reverse mortgage. These include:
- Services fees – This is the cost for the service the lender offers. It is usually a fixed monthly fee, and certain banks can roll it into the interest rate.
- Origination fee – Different banks may have different origination fees, but HECMs usually charge a 2 percent fee on the first $200,000 of your appraised home’s value.
- Home appraisal fee – Expect to pay this fee because lenders would want to know the exact value of your home.
- Closing costs – Like traditional mortgages, these mortgages also come with fees for title searches, credit reports, and documentation. The total fees will depend on the lender and your location.
- Mortgage insurance – If you choose an HECM, you will be paying an annual mortgage insurance premium (MIP). The insurance cover helps to ensure that you will still receive your money even when your lender closes down their business.
Can I benefit from reverse mortgages?
This is also critical when covering the question: How do reverse mortgages work?
As with any financial decision, taking ample time to make a sound decision is usually advisable. First, you need to learn all the specifics about this mortgage. You are likely to benefit from this loan if:
- You don’t plan to relocate
- You can afford to maintain your home
- You want to supplement your income
Some people might also use this mortgage to pay off their traditional mortgage.
Typically, the motivations for applying for a reverse mortgage differ widely, and you take ample time to reflect on the possible benefits before making your decision.
Keep in mind that your lender will carry out the monthly payments depending on a percentage of your home equity. Consider finding out the possible amount you can get monthly using your current equity and determine if the sum will make a difference to your financial life.
A reverse mortgage won’t benefit you if you are unable to meet the costs associated with the home.
Understanding this important and you won’t go about asking: How do reverse mortgages work?
Shopping for a reverse mortgage
The FTC recommends investing time to shop for the right mortgage that will serve its intended purpose. It is necessary to decide which type of mortgage will suit your needs.
Find several lenders and compare their options, fees, and terms to see whether they are somewhat favorable. Additionally, it is recommended you learn as much as you can about these mortgages before consulting a lender or counselor.
Try to ask as many questions as possible such as how do reverse mortgages work? what are your terms? Are there penalties?
Talk to your lender and let the explain the Total Annual Loan Cost (TALC) rates. Costs, such as origination fees, closing costs, interest rates, and servicing fees are usually different from lender to lender, so consider comparing them to see what option is right for you.
It also helps to ask for a quote from a lender.
Enjoy your retirement
Now, I hope this answers your “How do reverse mortgages work?” question. Reverse mortgages are ideal options for those people who have accumulated equity and want some money to supplement their income.
With most reverse mortgages, you usually have three business days after closing the deal to cancel your mortgage application without any penalty. This must be a written request, and the lender will have 20 days to refund any money you paid for financing.
With your money, you can plan what to do with it to make your retirement as convenient as possible. The mortgage allows you to stop worrying about your bills and get the most out of your retirements years.
Enjoy your retirement.