What is a reverse mortgage?
A reverse mortgage is a special type of loan that allows homeowners to use their homes as collateral. The financial product was developed in 1961 by a Maine bank and subsequently adopted by the United States shortly after. This type of loan was typically reversed for homeowners over the age of 62 whose primary asset was their home.
Homeowners could take out a loan against their equity and use the money freely, but it was generally done to supplement income. The age limit has dropped to 55, and the maximum reverse mortgage loan is currently $970,800 in 2022. Reverse mortgages are becoming a viable financial product for many Americans. And while reverse mortgages are not a perfect fit for everyone, but they could be for you. Unlike other loans, there are no monthly payments with a reverse mortgage loan. The full loan, including interest and fee, is due at the end of the loan’s term. This end typically occurs when the homeowner sells the home, moves, or is deceased.
What are the Options for Reverse Mortgage Loans?
There are currently three types of reverse mortgage loans: single-purpose reverse mortgage, federally-insured reverse mortgage, and proprietary reverse mortgage. Each type has its unique benefits and drawbacks, so be sure to read thoroughly about which type before deciding which may be best for you and your situation.
Single-purpose Reverse Mortgage:
This type of reverse mortgage is typically sponsored by the state, local institution, or a nonprofit. It is the least expensive and most rare type of the three reverse mortgages because they are not always offered in every location and have many restrictions. Single-purpose reverse mortgages are, just like their name, single-purpose. The lender will approve an amount that will be able to be paid for the approved item, typically home repairs. The high restrictions and lack of wide availability make this reverse mortgage fairly uncommon.
Federally-insured Reverse Mortgage:
This type of reverse mortgage is the only one backed by the United States Department of Housing and Urban Development. Formally known as a home equity conversion mortgage (HECM), it is the sole financial product on this list that is federally insured. The loan can be used for any purpose, but most lenders suggest owners reserve a small amount for property taxes and repair. Federally-insured reverse mortgages have a high upfront cost since it is federally insured, but there are no limits on how it can be used.
All federally-insured reverse mortgages will require financial counseling at the cost of the client. Most sessions will typically cost $125, but the client will be informed of all the risks and costs associated with the reverse mortgage. Payment options and an estimate of the loan amount will also be discussed in the session. The loan amount will greatly vary on the basis of the homeowner’s equity and age. Homeowners that are older and have paid off homes will be able to receive the ideal interest rates and loan amount.
Proprietary Reverse Mortgages:
Most homeowners with high-value homes will consider proprietary reverse mortgages because private lenders are known to offer higher loans on high-value homes. With a private lender, the client will have a higher chance of qualifying for the 2022 lending limit for reverse mortgages of $970,800.
This type of loan may require counseling if the lender requires it. Most sessions for proprietary reverse mortgages will do a cost-benefit analysis against HECM providers. Browsing reverse mortgage reviews alongside acquiring multiple quotes from both proprietary reverse mortgages and HECM providers are a great way to ensure you are getting the best option for your loan.
Unlike federally-insured reverse mortgages, there are no upfront costs with this type of loan. There are also no mortgage insurance premiums associated with the loan because they are private lenders. Interest rates will vary greatly in the private sector, which is why shopping around is ideal.
Should You Get a Reverse Mortgage?
Reverse mortgages are a successful financial product for many people. They can be a great option for those looking for a more comfortable retirement or in need of financial relief. There is also less flexibility with reverse mortgage loans that may make it unfavorable for certain borrowers. It is difficult to determine if a reverse mortgage is for you with an article. Like all loans, there are many drawbacks and benefits that vary in importance depending on the individual. Speaking to a financial advisor or reaching out for a counseling session may be the best way to determine if getting a reverse mortgage is for you.