Are reverse mortgages really scary? The number of this type of home loan is on the rise. As the older segment of the country is reaching retirement, many are finding that their nest eggs have disappeared. With their 401ks and other retirement vehicles sputtering, some are choosing reverse mortgage refinancing to beef up their retirement.
Understanding Reverse Mortgage Home Loans
Most commonly, the term reverse mortgage refers to the federally insured FHA home loans called HECMs (Home Equity Conversion Mortgage). Very simply, this is a loan against a portion of the equity in a person’s home and it allows a person to use some of the equity they’ve built up without selling the home. Proceeds from the loan are distributed to the borrower either in a lump sum or in periodic disbursements.
Like regular home loans, reverse mortgages have closing costs such as origination fees, appraisal fees, insurance and service fees (which can be financed into the loan), and the loan accrues interest over a period of time.
How HECM Reverse Mortgages are Different
- Unlike traditional mortgages, there are no income or credit qualifications to meet in order to qualify for a HECM and there are no loan payments to make while living in the home.
- Another difference is the age limitation to qualify. All borrowers must be at least 62 for this type of loan. They must own their home free and clear or the amount owed must be small enough that the balance can be paid off with the loan proceeds.
- Generally the home must be a single family residence although some multi-family units, condos and manufactured homes may qualify.
- In addition, borrowers are also required to receive counseling from HUD approved counselors before they can qualify. Homeowners can find the list of approved agencies on HUD’s website or call (800) 569-4287. The fees for counseling vary, so check around.
Borrowing and Paying Back a Reverse Mortgage
The amount mortgage lenders will approve on a HECM reverse mortgage is based on three things:
- the borrower’s age,
- the appraised value of the home (up to FHA limits), and
- the interest rate, which may be variable or fixed.
Prospective borrowers can try the AARP Reverse Mortgage Calculator to get an idea of how much they may be able to receive.
The reverse mortgage becomes due and payable when the borrower dies or moves out. It’s important to note that the loan may also become due if the taxes or insurance on the home are not kept current or if the home is not maintained.
The loan can be satisfied either by selling the home and using the proceeds to pay it off or, if the borrower wants to keep the home, they may pay it off with other funds or refinance.
Peace of Mind for the Borrower
FHA (HECM) reverse mortgages are non-recourse home loans, meaning that the lender’s only recourse to satisfy the loan is the home itself. So, when the borrower does sell the house to repay the loan, they won’t owe more money than the house is worth. However, if the house sells for more than the amount owed, the borrower keeps the remainder after the loan is satisfied.
These home loans aren’t for everyone, but understanding them may help borrowers find new avenues to bolster retirement.