Understanding Reverse Mortgages

The term “reverse mortgage” is one that most Americans have heard, yet many may know little about. Unlike refinancing a regular mortgage loan, this type of loan product usually allows homeowners who have considerable equity in their homes to convert part or all of the equity to cash without moving out of the home or pay additional monthly bills. Unlike a regular mortgage, you aren’t required to make monthly loan payments; you’ll repay the loan when you or your heirs sell the house.

However, because there is more than one type of reverse mortgage loan, it can be a confusing product.

How Reverse Mortgages Work:

Did you know it’s possible to get a mortgage with no payments?  Normally, when you take out a mortgage loan, the bank gives you a lump sum that you pay back with interest over time. At the end of the term, the loan is paid down to $0.

A reverse mortgage works in, well, reverse.

The lender actually makes payments to you. You can choose to receive a lump sum, monthly payments, a line of credit, or a combination of these options.

The interest and fees associated with the loan get rolled into the balance each month. That means the amount you owe grows over time. You get to keep the title to your home the whole time, and the balance isn’t due until you move out or die.

When the time comes, proceeds from the home’s sale are used to pay off the debt. If there’s any equity left over, it goes to the estate. If not, or if the loan is actually worth more than the house, the heirs aren’t required to pay the difference. Heirs also can choose to pay off the reverse mortgage or refinance the home if they want to keep the property.

Understanding the Types of Reverse Mortgage:

Single Purpose Reverse Mortgages are typically offered by a government agency or nonprofit organization and limited in scope. This option is typically for the purpose of assisting with property taxes, home improvements or some other type of home repair.

The second type, Home Equity Conversion Mortgage, or (HECM), is a type of reverse mortgage that is federally insured through the United States Department of Housing and Urban Development and has no usage or income requirements. This is the most common type of reverse mortgage.

The third type is called a Proprietary Reverse Mortgage. This one is a type of private loan, specifically backed and developed by individual companies.

Cash Out Payment Options:

Since the single purpose reverse mortgage is taken out for a specific purpose, it does not usually include a payment plan to the homeowner. The HECM and proprietary reverse mortgage, however, both include payment options that the homeowner needs to understand.

HECM Payment Options:

• a monthly cash payment that is fixed for a certain amount and period of time
• a monthly cash advance on a tenured plan for the length of time the homeowner remains in the home
• a line of credit option that can be accessed as needed, until the full amount is drawn
• a combined option that includes a monthly payment plan, plus an accompanying line of credit

In most cases, these payment options can be changed at any time after the loan is in place for a small fee.

Considerations to Understand Before Taking Out a Reverse Mortgage:

Borrowers should be familiar with possible risks and issues that can be part of the reverse mortgage process. These include, but are not limited to, origination fees, closing costs, service fees and interest accrual. In addition, homeowners should understand that they will continue to be responsible for upkeep, taxes, utilities, and other expenses normally incurred by homeowners even after the reverse mortgage has been taken out. You’ll want to be sure you plan to live in your home long enough to make these costs worth it. For this reason, borrowers are expected to take a counseling course prior to signing initial loan disclosures.

Is a Reverse Mortgage Right for You?

Ultimately, the decision to take out a reverse mortgage is one you should weigh very carefully. Because each homeowner’s situation is different, it is important to seek the guidance of a trusted loan professional when exploring the possibility of a reverse mortgage.

As a professional mortgage loan specialist serving the Salt Lake City area, I take my client’s needs seriously and can use my knowledge and experience to help you determine if a reverse mortgage, or any other type of home loan product is the right for you.

Give if me a call today and let’s discuss your situation to see if a reverse mortgage is right for you!