Reverse mortgages have been getting a lot of attention in recent years, as more people are looking into ways to capitalize on the equity in their homes. You might be aware that a reverse mortgage allows people to borrow money against the equity in their homes without having to pay it back; but how, exactly, does the loan work, and who qualifies?
How a Reverse Mortgage Works
There are three types of reverse mortgages:
· There’s the Home Equity Conversion Mortgage (HECM), offered by the FHA;
· There are the single-purpose reverse mortgages, which are designated for a specific purpose and are only available through certain state, local, and non-profit organizations; and,
· There are proprietary reverse mortgages, which are offered by private lenders.
When you take out a reverse mortgage, you get a sum of money — just like you would with a regular home equity loan. However, unlike a standard loan, you don’t have to make payments on it because the reverse mortgage works kind of like a lien against your property. If you sell your home, some or all of the proceeds of the sale will go toward paying off the loan. Additionally, if you move out of the home or pass away, the title automatically goes to the mortgage lender, and they can sell the property to repay the loan. However, if you do move out of the home, or pass away, you or your heirs also have the opportunity to pay back the loan and keep the property.
Generally, you can do whatever you want with the proceeds from the HECM and proprietary loans, however single-purpose loans can only be used for which they were initiated – such as home repairs or paying medical bills.
The reverse mortgage works to the borrower’s advantage because it allows him to live off the equity in his home without having to make large monthly loan payments.
Properties that Qualify for Reverse Mortgages
The type of property that qualifies depends on the type of loan you apply for. Current HUD/FHA regulations allow you to take out a reverse mortgage on free-standing, single-family, home that is more than one-year old, and is your primary residence. You can also take out a reverse mortgage on a condominium property, as well as on a multi-family property with four or fewer units, so long as you live on-site in one of the units. Some manufactured homes might also be eligible. Second homes and apartment co-ops are currently not eligible for reverse mortgages, however, some private lenders might have products that could apply to co-ops.
The Requirements for a Reverse Mortgage
Because the reverse mortgage is designed to help the elderly benefit from the equity in their homes, you must be at least 62 years of age, and you must own your home free and clear, or have a small enough balance that you can pay it off with some of the proceeds of the loan.
Before you apply for a loan with the FHA, you need to talk with an HECM counselor; private lenders could also have their own requirements.
After you get the loan, you must continue to live on the property, and you need to keep up with your property taxes, insurance, and any other fees associated with the home. You also need to keep up with maintenance and repairs.
How Reverse Mortgages Pay
You can get payments in several ways, depending on your needs and on the agreement that you reach with the lender. Some payments options include:
· Monthly payments for as long as you live in your home;
· Monthly payments for a specific period of time;
· One lump sum;
· A home equity line of credit; and,
· Any combination of the above, such as a portion as a lump sum with the remainder paid out over a specific time period.