Reverse mortgage: Cash for home equity and no monthly payments

What is a reverse mortgage?

A reverse mortgage gets its name because it is the opposite of a traditional mortgage. Instead of you paying the bank each month, it pays you. Reverse mortgages can supplement your income when you are retired and enhance your lifestyle. Of course, reverse mortgages are loans, and eventually do need to be repaid.

The big benefit

The reasons to take out a reverse mortgage are many and varied, but the single biggest benefit is that you can trade home equity for money without having to sell or make payments as long as you live there. It's also a way for people whose income or credit scores aren't high enough to qualify for traditional home equity loans to borrow without worrying about repayment.

Other benefits

With a reverse mortgage, you can choose to receive your loan as a lump sum payment, a credit line, monthly payments, or a combination of all three. You can use your reverse mortgage to pay off your current mortgage, eliminating house payments. You can choose a credit line so you have cash when you need it. And you can opt to have payments made to you monthly for either a certain number of months or for as long as you are in your home. There is no monthly repayment.

Where can you get a reverse mortgage?

There are three sources for reverse mortgages:

1. State and local governments (but the funds are usually restricted to use for taxes or repairs)

2. Authorized HUD lenders including banks, credit unions and mortgage companies offer federally-insured loans called Home Equity Conversion Mortgages (HECM)

3. Private lenders offering proprietary programs.

What are the differences between the HECMs and proprietary loans?

About 90% of reverse mortgages taken out are HECMs, which are regulated by HUD. The current cap on HECMs is $625,000 in most parts of the country. Those with more expensive properties who want larger loans have to go with proprietary loans. HECM loans fees are capped by the government, while proprietary lenders can set their own fees. Interest rates on both products can be fixed or variable and are market-driven, so it's important to shop with several lenders and compare rates.

How do you qualify?

There are two criteria for qualification for a reverse mortgage: you must be 62 or older, and there must be significant equity in your home. You do not need to have a minimum income, nor do you need a credit check. If you decide to apply for a reverse mortgage, you must first meet by phone or in person with a reverse mortgage counselor, and your home will be inspected and appraised.

How much will I be able to get from my home?

The amount of your reverse mortgage depends on four factors: your age (or the age of the youngest co-borrower), the amount of home equity, and the current interest rate. AARP offers an online reverse mortgage calculator that can give you a rough idea of how much you can borrow.

What are reverse mortgage interest rates?

When shopping for a reverse mortgage, you will get a disclosure form called the Total Annual Loan Cost (TALC) and it tells you what interest rate is on offer, when / it it adjusts, and what it will cost.

Is there any chance that I could lose my home?

A reverse mortgage is designed to keep you in your home. However, there are certain conditions that you as the homeowner must abide by to keep from defaulting. You must:

  • Pay your property taxes

  • Maintain your home in good condition

  • Keep your home insured

You must not:

  • Declare bankruptcy

  • Donate or abandon your house

  • Commit fraud

  • Lose your house to eminent domain

  • Rent out your home

  • Add new owners to the title

How is a reverse mortgage repaid?

Eventually all the reverse mortgage principal and interest must be repaid. The loan becomes due when the last surviving borrower dies or permanently moves out (defined as being away for one continuous year), you sell the house, or default. The loan is repaid by the sale of the property (any excess proceeds are returned to your heirs) or through other means as arranged with your heirs, estate planner and the lender.

Posted By :
Lorraine Watkins is a regular contributor to business and education websites. She is a notary in California specializing in loan documents. She holds an MA in English from California State University, East Bay.

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