Know Your Mortgage: Reverse Mortgages

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So you’ve been reading these “Know Your Mortgage” posts for a while now (humor me, internet) and you feel pretty confident with your discoveries so far. The mortgage process once was a labyrinth of information, but with the help of these blogs you’ve made the right turns to get out alive (bear with me). However, just when you think you’ve got a firm grasp on a situation the proverbial Minotaur in the labyrinth appears to turn everything on its head. What turned my head askew was the concept of a reverse mortgage. After I’ve learned so much about different types of home loans, you’re telling me they can go backwards now? Just unfair if you ask me, but reverse mortgages are very helpful for those who qualify. So let us venture onward into the world of reverse mortgages.

Alright, What Exactly Do You Mean by “Reverse Mortgage” ?

Well think of how a traditional mortgage works, fixed-rate or adjustable rate, and imagine the process backwards.

So…I Get Paid Money to Not Live In a House?

No, no, no. Okay, that was a bad set up. A reverse mortgage is also known as Home Equity Conversion Mortgage, or HECM, and it has a few requirements in order to qualify. It’s meant for older homeowners who may have troubles paying off a mortgage pre or post retirement. If an applicant is approved for a reverse mortgage, then their remaining payments on the house (if any) are wiped clean by their current equity. The only requirements for this are that the applicant(s) must be 62 or older, have the house their filing on be their primary residence, and they must have enough equity in the house to qualify.

Wait, What’s Equity?

It’s the “E” part of HECM, and it’s the difference between the current value of your home and how much you still owe for the property. You can raise the equity on your home by making home improvements, seeing if your house has risen in value over time, or just paying on your mortgage. If approved for a reverse mortgage, the applicant can get their equity back.

How So?

Well, we’re not there just yet. If you’re interested in a reverse mortgage and you qualify, you must get counseling about it from a government-approved agent beforehand. This is just for him or her to explain how the whole reverse mortgage program works, your responsibilities with it, and an estimate of your loan advances.

Also, there are costs that are paid to get the reverse mortgage set up; a mortgage insurance premium, origination fee, title insurance, a real estate appraisal and more. I can’t give an accurate cost for individual things or a total because I wouldn’t want to mislead, not to mention the prices will vary based on the home and where you live. Regardless, after that’s handled, you can get the money in one of four ways: a monthly payment, one lump sum, a line of credit, or any mix of the three mentioned.

So, You Just Have Like Unlimited Money After That?

No! It’s all coming from the previous equity you’ve built for you property. Remember, you stop paying on the mortgage once you start a reverse mortgage, so amount you owe will still continue to rise on the property. As a result, this will make your equity (possibly) shrink over time. Don’t be swayed though, there are a ton of benefits to a reverse mortgage. As mentioned before there are no more monthly mortgage payments, the house is still yours, and yours to give to your children or whomever in a will. You don’t even have to hit a required credit score or have a certain income bracket, and it’s insured by the federal government too.

When Does the Reverse Mortgage Get…Reverse Paid Off?

Beautifully put. When the loan is “done” (which can mean the house is sold, the owner moves or passes away amongst other things) the amount owed is whatever is cheaper between the home’s value or the current mortgage. From there the amount owed can be re-financed to keep the home, turned over to the lender, or sell the home and cash out the equity.

Sounds Fair Enough. Can I Apply for One Today?

Are you 62 or older?

I Don’t Know. You’re Writing These Questions.

Fair point; lets wrap this up before we get too meta.  As said before, a reverse mortgage can help those who are older, have most or all of their house paid, and need money for other things. As always, post additional questions below if you have more burning questions about reverse mortgages.