This article explains what a reverse mortgage is. It then details the pros and cons of the three different types of reverse mortgages, and how the funds can be distributed to the borrower. If you are over 62 and have 75%-100% equity in your home and need money for home improvements, pay taxes, or for living and medical expenses you should read this article.
What is a reverse mortgage?
How do you qualify?
How much can you get?
How do you get the funds?
How does a reverse mortgage effect your estate?
What to keep in mind.
1. What is a reverse mortgage?
A reverse mortgage is basically a home loan that cashes out your home’s equity that you, the homeowner, have gained over the years. This home loan doesn’t require a monthly payment like a traditional mortgage or second mortgage, and it doesn’t require you to repay it until the home is sold, the homeowner moves away, or until they pass away. Even if you outlive the life of the reverse mortgage, you don’t have to repay the loan as long as you are still living in the house, and as long as you keep current with your taxes and home insurance. HUD also suggests that you don’t use an estate planning service or a referral agency that charges a fee for locating a lender for you. Instead contact your local HUD agency and they will provide you with the information and leads that you need for free.
There are three different kinds of reverse mortgages: The single-purpose reverse mortgage, the federally-insured reverse mortgage, and the proprietary reverse mortgages.
Single-Purpose Reverse Mortgages
Single-purpose reverse mortgages are funded by various local and state governmental agencies and a few different nonprofit lenders. This type of mortgage has very low costs associated with it, but there are drawbacks to this particular reverse mortgage type that should be taken into consideration when thinking about applying for a reverse mortgage. The drawbacks for this type of reverse mortgage include: (1) Single-purpose reverse mortgages are not available everywhere, (2) their uses may be limited to certain activities like making home repairs or to pay property taxes, and (3) they are often only available to low to moderate income homeowners.
Federally-Insured Reverse Mortgage
The second type of reverse mortgage is the federally-insured reverse mortgage, which is also called a Home Equity Conversion Mortgage (HECM). The main advantage of this type of reverse mortgage is that it is federally insured and backed by the US Department of Housing and Urban Development (HUD). First there is more legwork involved in this type of revere mortgage then the other two types. Also before you can apply for an HECM program you are require to meet with a government-approved housing counselor. During this meeting the counselor is required to inform you about the costs associated with the HECM, the financial issues you will face with a HECM, and any possible alternative loan programs that are available to you. Generally speaking HECMs are more expensive and have more fees associated with them. Because of these extra expenses HECMs are not recommended for homeowners who don’t plan on staying in their home for a long time. On the other hand, the federally-insured reverse mortgage has many benefits that often outweigh its drawbacks. First this type of reverse mortgage is available almost everywhere, and secondly it has no income, medical, or use requirements like the single-purpose reverse mortgage has.
Proprietary Reverse Mortgage
Private companies back the final reverse mortgage, the proprietary reverse mortgage. This type of reverse mortgage is often times more expensive than traditional home loans. However, if you have a higher-value home you can get more money from a proprietary reverse mortgage than from you can from the other two types of reverse mortgages, and you won’t have to make monthly payments.