WHAT IS A REVERSE MORTGAGE?
A Simple Explanation
A Reverse Mortgage is a loan available to homeowners, 62 years or older, that allows them to convert part of the equity in their homes into cash.
The product was conceived as a means to help retirees with limited income use the accumulated wealth in their homes to cover basic monthly living expenses and pay for health care. However, there is no restriction how reverse mortgage proceeds can be used.
The loan is called a Reverse Mortgage because instead of making monthly payments to a lender, as with a traditional mortgage, the lender makes payments to the borrower.
The borrower is not required to pay back the loan until the home is sold or otherwise vacated. As long as the borrower lives in the home he or she is not required to make any monthly payments towards the loan balance. The borrower must remain current on property taxes, homeowners insurance and homeowners association dues (if applicable).
Reverse 4 America is here to assist you with your Reverse Mortgage Needs!
The three main types of reverse mortgages
Single-purpose
One type of reverse mortgage is the single-purpose reverse mortgage. With this type of reverse mortgage, you can only use the money for a single purpose. This purpose will be determined by the lender and it will be regulated. For example, you may only be able to use the money for home repairs or property taxes
FEDERALLY-INSURED (HECM)
***mOST POPULAR***
Another type of reverse mortgage is the federally insured reverse mortgage. One of the most common types of federally insured reverse mortgages is the FHA home equity conversion mortgage program (HECM). To qualify for this type of mortgage, you will have to meet the requirements of the FHA. The loan will then be insured by the federal government, which is a major incentive for the lender.
TYPICAL USES FOR A REVERSE MORTGAGE
- Pull funds out of the equity of your home.
Historically this has been the most popular use for a Reverse Mortgage. Senior ( 62 years old or greater ) homeowners with equity more than about 50% of the appraised value of their home can refinance their current mortgage ( if any ) and pull out funds from their home’s equity, ending up with both cash in hand and no more monthly loan payments.*
2. Take out a line of credit on the equity in your home.
For those seniors who have no mortgage remaining on their homes, they can acquire a Reverse Mortgage, not initially take any draws against their home equity, and simply use their new line of credit as an emergency fund. In cases of emergency, this strategy can prevent having to sell other retirement assets.
3. A combination of pulling out equity and have a line of credit available.
This is another Reverse Mortgage option. Take a blend of an initial draw, and keep great than ~ 50% equity in your home as an emergency line of credit. There is an additional option to receive monthly payments, either instead of, or in addition to an initial draw. As you can see, a Reverse Mortgage is very flexible and can be tailored to the borrower’s unique situation.
4. Purchase a home using a Reverse Mortgage
This option is a relatively recent option for an FHA insured Reverse Mortgage. This very popular recent Reverse Mortgage option is known as a “HECM for Purchase” or H4P.
The details of the percentage of the loan versus the value of the home vary based on the borrowers age and a number of other details. Roughly, an H4P can be around 50% of the home’s value. Example: Say you own a home worth $500,000, but you are now an “empty nester” and want to down size. Your current home has a 1st mortgage of $200,000, so following a sale, with commissions and various fees, you will end up with a little less than $300,000 cash. You want to move close to your kids and the homes in that area are around $300,000. Since you are no longer working, and don’t have significant monthly income, it will be difficult to qualify for a loan on a new home. Using an H4P, you can make a down payment of roughly 50% of the new home’s value ( $150,000 ), still have $150,000 cash remaining, and as long as you live in your new home, pay the property taxes, homeowners insurance, and HOA dues ( if applicable ), you will never have to make a monthly mortgage payment.
The H4P also has a number of other exciting applications. Contact a Reverse4America representative for suggestions with your specific situation.
* Reverse Mortgages require the borrower to continue to pay Property Taxes, Homeowner’s Insurance, and HOA dues ( if any ).
THE LOAN PROCESS
1) education
Your Reverse4America Reverse Mortgage Advisor will help you determine if a Reverse Mortgage is the right solution for you, and if so, which type best fits your needs and goals. to help you make an informed decision, we'll answer all your questions, asses your individual needs and financial situation, thoroughly explain everything, and prepare you for your independent counseling session. We encourage you to include your family members and trusted advisor(s) in your decision-making process.
2) Independent counseling
To ensure that you understand all aspects of a Reverse Mortgage, you're required to have a session with an independent counselor who's approved by the U.S. Department of Housing and Urban Development (HUD). It usually takes about 60 to 90 minutes, and can be done in-person or over the phone. (Some states require face-to-face counseling).
3) Application
Your Reverse Mortgage Advisor will help you complete the application and collect your documentation. He or she will let you know exactly which documents you'll need to provide.
4) Property appraisal, loan processing, and approval
Your Reverse Mortgage Advisor will submit the paperwork and we'll process your application. We'll order a home appraisal, which determines the exact value of your home. We'll also order title work and existing mortgage payoff amounts. An underwriter will then review your application for approval.
5) Closing
Once the loan is approved and final documents are ready for your signature, we'll contact you to schedule your loan closing, which can take place at your home. Any existing mortgage(s) will be paid off with a portion of the proceeds from your Reverse Mortgage. After the closing and any applicable rescission period, the loan will fund and you'll receive your money.
what researchers and the media are saying about reverse mortgages
Forbes / Personal Finance
"While there are a variety of ways to utilize home equity as part of a retirement income plan, reverse mortgages deserves special attention and consideration. Tapping into your home equity through a reverse mortgage HECM line of credit can be an effective way to reduce your sequence of returns' risk and avoid selling your investments when they drop in value."
- Jamie Hopkins, Contributor, "Reverse Mortgages Can Be a Retiree's Saving Grace," October 7, 2015
Kiplinger / Wealth Creation
"in the right circumstances, a reverse mortgage can be a huge benefit; these loans, guaranteed by the federal government, allow seniors age 62 and older to tap their home equity while remaining in their home."
- Kathy Kristof, "6 Ways to Avoid Outliving Your Retirement Nestegg," October 2015
CBS News
"Reverse Mortgages can provide a way for many Americans to fund a comfortable retirement and may grow in popularity as millions of baby boomers enter their golden years."
- Aimee Picchi, "Reverse Mortgages May be Ready for a Revival," June 2, 2014
The Wall Street Journal / The Experts
"For individuals who are planning to downsize their home, or who are otherwise thinking to move in retirement, an alternative now available is the HECM for Purchase. Downsizing combined with the HECM for Purchase can potential free up a large amount of home equity and create more liquid financial assets to help sustain a retirement spending objective over retirement.
- Wade Pfau, "The Case for Reverse Mortgages," December 1, 2014
The New Your Times/Your Money
"One approach is a standby reverse mortgage, where borrowers open a line of credit that can be tappend when necessary. Opening a credit line while interest rates are low, even if you don't need the money now, can result in a larger credit line now than when rates are higher....." - Tara Siegel Bernard, On Retiring, "6 Strategies to Extend Savings Without Working Longer," August 7, 2015