Between the rising costs of healthcare, living expenses and limitations on Social Security, many Americans reach age 62 without enough money saved to sustain themselves through retirement. A reverse mortgage is a potential solution that can help you tap into your home equity you have in your home and cover your expenses.
We’ll teach you a little bit more about what reverse mortgages are, how they work and their pros and cons. We’ll also introduce you to a few different types of loans, so you can decide which type of reverse mortgage may be a good fit for you.
What Is A Reverse Mortgage?
A reverse mortgage is a mortgage loan that allows you to borrow against the equity in your home. Reverse mortgage loans allow those who are 62 or older to use their equity for anything they want, including covering the costs of retirement. Unlike a traditional mortgage, borrowers don’t have to make payments on a reverse mortgage. Instead, the loan pays off your existing mortgage, then pays you the remainder of the money.
Types Of Reverse Mortgages
There are three main types of reverse mortgages. Let’s take a look at their differences.
Single-Purpose Reverse Mortgage
A single-purpose reverse mortgage is a loan for a single purpose that the lender specifies beforehand. For example, the lender might say that you can only use the loan for home repairs, property taxes or insurance premiums. While these types of reverse mortgages come from local governments and charitable organizations, they aren’t available everywhere.
Proprietary Reverse Mortgage
A proprietary reverse mortgage is a reverse mortgage issued by a private lender. If you have a high-value home, you may need to take a proprietary loan to get a reverse mortgage.
Home Equity Conversion Mortgage
HECMs are the most common type of reverse mortgage, and you can spend the money you get from a HECM on anything. HECMs are also government-backed up to $726,525. Because of this, you may want to seek out a proprietary reverse mortgage if your home is worth more than $726,525. Because they are insured by the government, there are a few additional qualifications you need to meet to get a HECM. Because these are the most common types of reverse mortgage loan, we will focus on the HECM for the remainder of this article.
How Does A Reverse Mortgage Work?
With a reverse mortgage, your lender orders an appraisal to decide how much money you can get over the course of your loan. After paying off your current mortgage, the remainder of the funds are distributed in a lump sum, through monthly payments, in a line of credit, or any combination of the three. You can make payments to the loan if you want, but you are not required to repay a reverse mortgage until you sell the home, no longer live there, or pass away. You must be at least 62 years old to get a reverse mortgage and you must live in your home as your primary residence. You’re also required to pay your property taxes and homeowners insurance throughout the life of the loan.
It’s important to note: a reverse mortgage is not free money. The “reverse” in “reverse mortgage” refers to your loan balance. With a conventional mortgage, you make payments every month and your loan balance goes down. It’s different with a reverse mortgage. While you remain in control of your home, monthly interest is added to the loan balance, increasing your debt throughout the life of the loan – unless you decide to make payments on the loan.
What Are The Pros And Cons Of A Reverse Mortgage?
As with any big financial decision, it is important to weigh reverse mortgage pros and cons to make sure it’s the right option for you. Here are a few to get you started.
Pros Of A Reverse Mortgage
A reverse mortgage can offer several benefits:
- You get to remain in your home and your name stays on the title.
- You can access your home’s equity without selling your home or making monthly mortgage payments.
- Reverse mortgages are immune from declining home values because they’re nonrecourse loans. Nonrecourse loans don’t allow the lender to take more than the collateral (your home) to restore your debts. Therefore, you’ll never owe more than what your home is worth.
Cons Of A Reverse Mortgage
Reverse mortgages aren’t for everyone. The loan comes with a number of drawbacks that you might want to consider before you get one:
- Reverse mortgages decrease the amount of equity you have in your home.
- Your loan balance will increase if you don’t pay down your interest over time.
- You may outlive your loan’s benefits if you don’t choose the monthly tenure payout method.
- A reverse mortgage can make it more difficult for your heirs to benefit from the equity in your home after you pass away.
What Can You Do With Reverse Mortgage Money?
When you get a reverse mortgage, the first order of business is to pay off any existing debt that’s still on your original mortgage. You get the remainder of the money from the loan once your existing mortgage gets paid off. If you own your home free and clear, you can get the full value of the loan.
You can use this money for anything, including supplementing your finances during retirement. While every situation is different, a few ways others have used a reverse mortgage include:
- Lowering monthly mortgage payments
- Increasing monthly cash flow
- Consolidating debts
- Paying for in-home care
- Making home improvements
- Supplementing income
- Creating an emergency fund
- Protecting home equity from declining markets
You may choose to put your funds into a line of credit that you can access whenever you need it. This is similar to a traditional home equity line of credit, with some key differences. For example, you aren’t required to make payments on the loan, and as long as you stay in the home and uphold your financial obligations of the loan, a reverse mortgage line of credit cannot be suspended or called due. One of the biggest advantages of a reverse mortgage line of credit is that any unused funds increase in value over time, giving you access to more money in the future.
What Do You Have To Pay With A Reverse Mortgage?
As with most loans, there are closing fees and ongoing costs associated with a reverse mortgage. Before you get a loan, you’ll need to attend reverse mortgage counseling, which will be an out-of-pocket expense for you. There will also be a few upfront costs, including origination fees, a mortgage insurance premium and closing costs. Lenders also add monthly fees and interest to the amount you will owe back. As your debt accumulates, your home equity shrinks. As stated above, you still need to pay property taxes and homeowners insurance while you live in the home. You’re also obligated to maintain the condition of the home and cover maintenance costs. These are important obligations to remember because you could lose your home to foreclosure if you fall behind on property taxes or let your home deteriorate.
Can You Sell Your Home With A Reverse Mortgage?
You may still sell your home if you have a reverse mortgage. However, you must pay back the debt you’ve accrued after you sell your home. Before you list your home for sale, contact your reverse mortgage lender and confirm the amount you owe. You may keep the remainder and put it toward a new home if your home sells for more than your appraised value. If your home sells for less than what’s owed on the loan, you won’t be responsible for paying the difference. You’ll never pay more on the loan than the value of your home.
You may wish to leave your home to your children or other relatives after you pass away. A reverse mortgage can make this difficult because you accept a lien on your home. A lien is a bank’s legal claim to an asset – your home. In other words, the bank has the first claim on your property once you’re gone from the home. However, your heirs do have a few options. They can pay off the debt you owe by purchasing the home for the amount owed or for 95% of the appraised value – whichever is less. This can be done by paying on their own or refinancing the loan into a regular mortgage. They can sell the home and pay back the lien with the proceeds. If the home sells for more than it’s worth, they can keep the remaining money. If it sells for less than what’s owed, they won’t have to pay the difference.
Finally, they can allow the home to go into foreclosure. The decision your heirs make will usually depend on how much equity is in the home. You shouldn’t take a reverse mortgage if leaving your home to your heirs is a high priority for you.
Reverse Mortgage Alternative: Cash-Out Refinance
Although Quicken Loans® doesn’t offer reverse mortgages at this time, we do offer cash-out refinances. For a homeowner in the right situation, this could provide a very viable or even better alternative.
A cash-out refinance accomplishes one of the major goals of a reverse mortgage in that it allows you to access the equity in your home. In most instances, you do have to leave at least 20% equity in your home when you take cash out, but this does allow you to have the flexibility to choose how much money you want to take out if you have enough equity. Additionally, for qualifying active-duty servicemembers, veterans or eligible surviving spouses with a median FICO® Score of 680 or higher can cash in up to the full value of their home with a VA loan from Quicken Loans®.
Although you’ll have a monthly mortgage payment, with this comes one other advantage. If you should pass before the mortgage is paid off, those who inherit your house have the option of selling it or letting the property go back to the lender, just as they would with a reverse mortgage. But if they want to keep the property, they don’t have to qualify for a full refinance of the mortgage. They have the option of continuing to make the payments on the current loan and either formally assuming it or otherwise refinancing at a later date. This could give flexibility if someone’s credit isn’t in great shape at the moment, but they have the money to make the payments. With a reverse mortgage, heirs who wish to keep the home must refinance the loan, pay it off entirely or purchase the home for 95% of the appraised value – whichever is less.
If you’re interested in a cash-out refinance, you can get started with Rocket Mortgage® by Quicken Loans®.
A reverse mortgage is a type of loan you can use to borrow from the equity in your home – as long as you’re 62 or older. A reverse mortgage allows you to lower or eliminate your monthly mortgage payments and still live in and own your home. Your lender gives you a loan to pay off your current mortgage and you can keep whatever is left over.
You can use the money you get from a reverse mortgage for anything, and you can get your money in a lump sum, monthly installments or in a line of credit. You’re still responsible for paying for property taxes, insurance and maintenance costs. The bank may foreclose on your home if you fall behind on any of these. Either you’ll repay the loan when you leave your home or your heirs will pay it off when you pass away.
Reverse mortgages can be a good idea for seniors who need more monthly income but still want to live in their home. However, a reverse mortgage might not be the best choice for you if you want to pass your home down to your children or you plan on vacating the home in the near future.
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