If you own your own home and are at least 62 years of age, a reverse mortgage provides an opportunity to convert your home equity into cash. In the most basic terms, the reverse mortgage allows you to take out a loan against the equity in your home, but you don't have to repay the loan during your lifetime as long as you are living in the home and have not sold it. If you want to increase the amount of money available to fund your retirement, but don't like the idea of making payments on a loan, a reverse mortgage is an option worth considering. (For more, read Is A Reverse Mortgage Right For You? )
How They Work
With a reverse mortgage, a lender makes payments to you based on a percentage of the value in your home. When you no longer occupy the property, the lender sells it in order to recover the money that was paid out to you.
While there are several types of reverse mortgages, including those offered by private lenders, they generally share the following features:
- Older homeowners are offered larger loan amounts than younger homeowners. More expensive homes qualify for larger loans.
- A reverse mortgage must be the primary debt against the house. Other lenders must be repaid or agree to subordinate their loans to the primary mortgage holder.
- Financing fees can be included in the cost of the loan.
- The lender can request repayment in the event you fail to maintain the property, fail to keep the property insured, fail to pay your property taxes. declare bankruptcy. abandon the property, or commit fraud. The lender may also request repayment if the home is condemned or if you add a new owner to the property's title, sublet all or part of the property, change the property's zoning classification, or take out additional loans against the property.
Reverse mortgages have been around since the 1960s, but the
most common reverse mortgage is a federally-insured home equity conversion mortgage (HECM). These mortgages were first offered in 1989 and are provided by the U.S. Department of Housing and Urban Development (HUD). HECMs are the only reverse mortgages issued by the federal government, which limits the costs to borrowers and guarantees that lenders will meet the obligations. The primary drawback to HECMs is that the maximum loan amount is limited.
Non-HECM reverse mortgages are available from a variety of lending institutions. The primary advantage of these reverse mortgages is that they offer loans in amounts that are higher than the HEMC limit. One of the drawbacks of non-HECM loans is that they are not federally insured and can be significantly more expensive than HECM loans.
Total Annual Loan Cost
Although the interest rate on an HECM mortgage is set by the government, and the origination cost of an HECM loan is limited to 2% of the value of your home, the total cost of the loan can still vary by lender. Furthermore, in looking for a lender, borrowers must consider third-party closing costs, mortgage insurance, and the servicing fee. To assist borrowers in comparing mortgage costs, the federal 'truth-in-lending law' requires mortgage providers to present borrowers with a cost disclosure in the form of the total annual loan cost (TALC). Do be sure to use this number when comparing loans from different vendors; just keep in mind that the actual costs of a reverse mortgage will depend largely on the income options selected.
HECM reverse mortgages provide the widest variety of income generating options, including lump-sum payouts. credit lines. monthly cash advances, or any combination of these.
The credit line is perhaps the most interesting feature of an HECM loan because the amount of money available to the borrower increases over time by the amount of interest. Non-HECM loans offer fewer income options. (For other home financing options, read The Home-Equity Loan: What It Is And How It Works .)