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What is a reverse mortgage and how does it work?
You’ve probably heard of reverse mortgage lenders and the loan products they specialize in, but you may not know what a reverse mortgage loan actually is. If you’re 62 years old or older, it pays to know more about them, as it can help you do more with what’s likely your largest asset: your home.
A reverse mortgage loan is similar to any other mortgage product – it enables you to conveniently borrow a large sum of money so you don’t have to draw from your own savings. You can use these funds to pay for health insurance, medical bills, credit card debt or even home improvement projects.
What makes it unique is instead of paying down what you owe on a monthly basis to reverse mortgage lenders, you actually receive the funds, which you can then use to finance a variety of costs. You have choices for how you obtain these funds, be it as a lump sum, line of credit or in installments.
What’s the catch?
There are a few caveats to reverse mortgage loan eligibility, aside from how old you are. The house you’re borrowing against must be your primary residence and you must own it outright. If you still have some payments left, that’s OK, so long as the balance is low enough to pay via the proceeds of your reverse mortgage.
Here are a few other important factors to keep in mind before you apply:
- Your home must be a single-family, multifamily (2 to 4 units), FHA-approved condominium or manufactured residence.
- You have to obtain guidance from a mortgage counseling agency, approved as such by the U.S. Department of Housing and Urban Development.
- The house must be in good working order, which your reverse mortgage lender can help you determine.
- You must maintain and/or be up to date on certain expenses, including property taxes, homeowner’s insurance, federal income taxes and student loans (if any).
What types of reverse mortgages are available?
The most common variety of reverse mortgage loan is a home equity conversion mortgage, or HECM. An HECM for purchase uses the value, or equity, your home has accrued and converts it into cash. HECMs also have the backing of the federal government; this means they can only be offered by loan entities and reverse mortgage lenders that are approved by the Federal Housing Administration.
Two other products similar to HECMs include single-purpose and proprietary reverse mortgages. Single-purpose are traditionally offered by non-profit organizations and government agencies and can only be used in one way. The lender decides how. While these may have fewer options, single-purpose tend to be more affordable and have looser eligibility requirements.
Proprietary are backed by private entities and are popular for people whose homes are appraised at a higher value. This is part of the reason why they’re often referred to as jumbo reverse mortgages. The loan limit on jumbo reverse mortgages has risen over the years and now stands at $765,600, as of Jan. 1, 2020. This increase was implemented by Congress and signed into law, the fourth year in a row HUD has raised the limit.
How does a reverse mortgage get paid back?
Borrowers have many options, but the most common is putting their house on the market and using the proceeds from the sale as payment. Selling your home as-is isn’t your only option. Your heirs can sell it for you after you pass away or they can refinance the property, based on the latest rates and valuation, on your behalf. You can also use what savings you have available and pay the balance that way. Setting aside a portion of the reverse mortgage funds to use for ongoing fees, like mortgage insurance premiums, is another repayment strategy people often use.
Here at Nationwide Mortgage Bankers, our goal is to provide you with the home loan products you need at a price you can afford. We do it through the Mortgage Clarity Guarantee. Whether it’s a reverse mortgage loan or some other option, our mission is supplying you all the specifics you need to make the financing decision that’s best for you and your budget. Contact us today to learn more!
Finding the right lender…
Since you might have your mortgage for up to 30 years, it’s important to make sure you’re aligning yourself with a knowledgeable, approachable lender. Especially as a first-time buyer, you will feel more at ease working with a bank you can trust.
At Nationwide Mortgage Bankers, we strive to provide our borrowers with a transparent, personalized experience. For more information on the mortgage process, or to find out more about our mortgage products, view our diverse offering of Services, and Get Started on your home loan preapproval application today.