As the baby-boomer generation ages and the availability of post-retirement income diminishes, there has been a clear demand for ways for people to tap into the equity in their homes in new and innovative ways. Enter the rise of the reverse mortgage. But not many people understand it. A mortgage that pays you? Explanation needed!
Let’s start with the basics. Reverse mortgages (commonly called HECMs by FHA and HUD) are only available to people 62 and older. If you don’t fit this category, you don’t qualify. Over years and years of mortgage payments, a homeowner can build up a significant amount of equity or eventually pay the mortgage off completely, thus owning the home free and clear. Instead of sitting on the piggy bank, reverse mortgages allow homeowners to turn the tables and have their home write the checks to them.
How does it work? Reverse mortgage loans typically require no repayment for as long as you live in your home. They must be repaid in full – including interest and financed closing costs – when the last living borrower permanently vacates or sells the property. Because the borrower(s) makes no monthly payments, the amount you owe grows larger over time. As your debt grows larger, the amount of equity you have left after selling and paying off the loan generally grows smaller.
The best part about reverse mortgages is that all of them are non-recourse loans which means the borrower is not responsible if, in the end, the mortgage exceeds the home’s value.
What’s the catch, you say? All borrower(s) must be 62 years of age, occupy the home as their primary residence for the majority of the year, and own the home outright or with a relatively low mortgage balance that must be paid off through the proceeds of the reverse mortgage. For those of you concerned about income requirements, fear not! That’s the reason reverse mortgages were created! Unlike conventional mortgages, the reverse mortgage is different in that it pays you, and is available regardless of your current income.
Like a conventional mortgage, the home must continue to be maintained and all taxes and insurance must be paid as usual by the borrower.
Some people think a reverse mortgage means you are turning your home over to a lender. Not so. A reverse mortgage is a loan against the property, and only becomes payable when the last remaining borrower sells the homes, permanently leaves the home or passes away. The title remains in the name of the borrower and the lender is only repaid the remaining balance or home value; whichever is less. If the borrower is deceased, the home will go to the heirs of the borrower. They can sell the home or do a conventional refinance.
Like conventional mortgages, there are fixed and adjustable-rate reverse mortgages. A borrower can choose monthly payments or a lump sum payment. Due to the lender risk involved, costs and rates are typically higher than a conventional loan, but vary greatly by program or lender. Before qualifying for a reverse mortgage, third party counseling is required. Options can be explained and considered at that time.