Available only to home owners or buyers over 62 years of age, reverse mortgage loan that gives you the possibility of converting a part of the equity in your home into cash. In a regular mortgage, the loan has to be paid back monthly, but in a reverse mortgage the loan is paid when the borrower dies. The heirs have the option of refinancing and paying back the loan, give the home to the lender, or selling the home and cashing out the remaining home equity. When applying for a reverse mortgage loan, there are no credit score requirements because there are no payments made on the mortgage.
Types of Reverse Mortgages
The three basic types of reverse mortgages are:
- The single-purpose reverse mortgage. This is a type of reverse mortgage that is offered by government agencies and non-profit organizations, and it’s geared towards seniors with low to medium income. The single-purpose reverse mortgage can only be used towards the purpose defined by the organization that gives the loan, like paying for home repairs or property taxes.
- The federally-insured reverse mortgage. Also known as Home Equity Conversion Mortgages (HECM) and backed by the government through the U. S. Department of Housing and Urban Development (HUD), the federally-insured reverse mortgage is more expensive, but can be used for any purpose and has no income requirement.
- The proprietary reverse mortgage. A type of reverse mortgage that is offered by a private company, based on the borrower’s age, income and property value.
Loan Size and Cost
The maximum amount that you can borrow through a reverse mortgage loan is $625,500. Loans that exceed this amount are called jumbo reverse mortgages and, besides having higher fees, are not insured by the Federal Housing Administration (FHA). The factors that determine the amount that you can borrow are the property value, interest rate and age of the borrower.
Reverse mortgage loans are not taxed and won’t interfere with your Social Security or Medicare benefits. You will have to pay an origination fee, a mortgage insurance premium(MIP) for HECMs, a title insurance, and different other closing costs.
Interest Rates
Adjustable interest rates were offered through all reverse mortgage programs before 2007. Several reverse mortgage organizations offer fixed interest rates now, but with the condition that the borrower takes out the whole amount offered after closing. On the other hand, when taking out a loan with an adjustable interest rate, the funds can be provided as a monthly payment or a line of credit.
Interest rates are usually lower for a reverse mortgage loan than they are for a regular home equity loan, but they are not deductible on income tax returns until the loan is paid off in part or in full.
One disadvantage to reverse mortgages is the raised upfront cost, but the high upfront cost is later mitigated by the lower interest rates. Seniors must be fully documented before taking this step, as it’s a fairly confusing process that can become very costly for them or their heirs.