What Exactly Is a Reverse Mortgage?
Reverse mortgages are financial products that have been available in the United States since 1961 when a Maine-based bank issued the first reverse mortgage.
A reverse mortgage is a loan that differs from a standard mortgage in some ways. It enables homeowners 62 and older to borrow money by using their homes as collateral. It is frequently used to pay off current mortgages, assist with healthcare costs, or augment current income. Repayment of a reverse mortgage is often not required until you die, move, or sell your home.
Homeowners can choose between three sorts of reverse mortgage loans: single-purpose, federally insured, and proprietary.
Reverse Mortgages for One Purpose
State, local, and charitable organizations all provide single-purpose Refinancing Reverse Mortgage. Because it is guaranteed by the government and other NGOs, it is the least expensive alternative for a reverse mortgage loan. As a result, homeowners should expect to pay less in interest and fees with a single-purpose reverse mortgage than with a HECM or a proprietary reverse mortgage.
This is the least popular of the three types of loans and is not available in every state. It differs from home equity loans in that it can be utilized for any purpose.
Mortgages Converting Home Equity (HECMs)
Home equity conversion mortgages (HECMs) are federally insured, which means they are backed by the Department of Housing and Urban Development (HUD). This loan is likely to be more expensive than a standard home loan, with significant upfront charges. It is the most often used reverse mortgage because there are no income or medical conditions, and the loan can be used for any purpose.
Before applying, you must have counseling. This ensures that the homeowner understands all of the prices, payment options, and responsibilities. As long as they are eligible, interested parties are also notified about any nonprofit or government-issued alternatives. The counseling session costs money, which can be deducted from the loan proceeds.
Private Reverse Mortgages
Private lenders finance proprietary reverse mortgages, which are not backed by the federal government. They help homeowners who seek more money and whose homes have greater appraised worth.
This means that if your property is valued more than the federally backed HECM financing maximum of $970,800 in 2022, you may be eligible for a proprietary reverse mortgage.
People with modest mortgage balances are eligible for greater money. Before applying, counseling may be required, which can assist in comparing the costs and benefits of a proprietary loan and a HECM. Payment is made in the same manner as with the HECM option, with the option of a lump sum or a series of monthly installments.
What happens to my reverse mortgage if I pass away?
After your death, your reverse mortgage becomes payable. Your heirs can pay it off with their own money, refinance the home to pay off the reverse mortgage, or the lender will sell the home to pay off the reverse mortgage sum.