What Is A Reverse Mortgage?
You may have heard the term before, but maybe you still understand very little of the topic. If you’ve heard of reverse mortgages but don’t exactly know what it is, you’re not alone. A reverse mortgage is an option available to seniors who are trying to find ways to fund their living expenses, senior care, retirement, or anything related to their lifestyle.
Reverse mortgages are an opportunity for those who are in their golden years (above age 62) to collect cash payments by turning their homes into equity. This is a great financial tool for those who are wanting to plan their retirement as the monthly payments are tax-free. Reverse mortgages are helpful to those who are not planning to move or sell their home and are looking to increase their cash flow. Seniors can borrow loans using their home’s equity value as collateral.
With a reverse mortgage, if you still have a mortgage payment on your property, you can use your loan payments to cover your mortgage. You can also use the loan to supplement your income, make remodeling or repairs to the home, or pay off expensive medical bills or living expenses.
HECM: Home Equity Conversion Mortgage
Most reverse mortgages are also known as HECM, a home equity conversion mortgage. These are federally insured loans backed by the US federal government. In order for you to be eligible for the loan, the Federal Housing Administration (FHA) has to approve of the condition of your home.
Borrowers get to choose from a variety of plans to choose how they receive the distributed funds: a lump-sum, a line of credit, or monthly payments. The great benefit of a reverse mortgage is that as you live in your home there is no need to pay off the loan. However, you will be responsible for up-keeping the property, paying for costs such as insurance and taxes for the house. Should you choose to move out of the home, you will have to pay the loan by selling the property. The loan will only need to be paid off 6 months after you pass away or move out from your property.
Your heirs can then help pay off your loan by either paying off the reverse mortgage to keep the property, or by selling off the home. When your heirs sell the home for an the amount less than the value of the reverse mortgage loan, your heirs will not need to pay the rest of the loan since the loan is non-recourse. However, if the amount is greater than the reverse mortgage loan, then your heirs will be able to keep the proceeds.
There are also other types of reverse mortgages, such as the HECM for purchase loan, which allows you to purchase your next home. Like the regular HECM, this plan is also federally insured by the government through the Federal Housing Administration. This loan allows you to use the equity value from selling your first home to pay for your new home. This is a helpful plan for those who are wanting to move into a new residence in order to be closer to family, or for those who want to downsize into a smaller home.
Other Types of Reverse Mortgages
Another different type of reverse mortgage is the proprietary reverse mortgage (also known as the jumbo reverse mortgage). The proprietary reverse mortgage is very similar to the typical HECM reverse mortgage, allowing homeowners to convert their home equity into cash payments. However, unlike HECM, proprietary reverse mortgage plans are uncommon. Another major difference is that the proprietary reverse mortgage is not federally insured by the Federal Housing Administration, and are therefore less regulated.
Borrowers can choose lenders from private companies and can also choose the amount they want to borrow. This also means that the lender fees are greater. This loan is especially beneficial to you if your home is valued into the millions, since the current HECM cap (as of 2018) is $679,650. The home will still be appraised for its value, so if your home is valued in the millions, you can consider both the HECM plan as well as the proprietary reverse mortgage plan. With proprietary reverse mortgages, there is also less flexibility in terms of cash payout. Most loans are disbursed through a one-time lump-sum payment.
For all your financing questions, Qik Home Loans is here to help you walk through your mortgage needs. Call us today at (855) 200-8672 and our advisors can help you find the best home loan for your situation.