A reverse mortgage is a financial product designed for homeowners who are at least 62 years old, allowing them to convert their home equity into cash. Unlike traditional mortgages where borrowers make monthly payments to the bank, a reverse mortgage enables borrowers to receive cash payments from the provider based on their home equity.
The reverse mortgage proceeds are first used to pay off any outstanding mortgage balance, and the remaining funds are paid to the borrower. While borrowers are no longer required to make monthly mortgage payments, they are responsible for paying property taxes, homeowners insurance, and home maintenance costs.
Repayment of the reverse mortgage is required when the borrower moves out of the home or passes away. Additionally, if the borrower fails to maintain the property or falls behind on property taxes or homeowners insurance, the reverse mortgage becomes due. At Quintessential Mortgage Group, we can assist in the various reverse mortgages that are available.
The Home Equity Conversion Mortgage, commonly referred to as HECM, is the most popular type of reverse mortgage. It is backed by the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA). HECM loans allow borrowers to access a portion of their home equity, based on the borrower’s age and the home’s value, up to a maximum of $970,800 (as of January 1st, 2022). Borrowers can choose either an adjustable or fixed interest rate.
Adjustable rate option: This option enables borrowers to receive the loan amount as a lump sum, line of credit, monthly payment, or a combination of these options. They can also adjust the monthly disbursement amount or specify a fixed disbursement amount based on their available funds. Additionally, choosing the line of credit option means the available credit can increase and grow based on the interest rate. Unlike Home Equity Line of Credit (HELOC) options, the HECM line of credit is not subject to cancellation or reduction as long as the loan terms are met. Borrowers can open a HECM line of credit now and use it for future needs.
Fixed rate option: This is useful for locking in a low-interest rate but is only available as a lump sum disbursement. This can be beneficial if interest rates are low when the loan is initiated, as the borrower’s interest rate will not increase even if market interest rates rise. Additionally, fixed rate loans offer the borrower a one-time lump sum disbursement of the loan amount, which can be useful for those who need a large sum of money upfront.
The HECM for Purchase is a specialized offering that aims to aid senior homeowners in acquiring a new home that caters better to their requirements while simultaneously securing a reverse mortgage. This option has proven to be beneficial for several seniors who desire a residence that is in closer proximity to their family, more compact in size, or accommodates their physical requirements related to aging, such as handrails, ramps, and wider entrances that are all located on the ground level.
One significant advantage of this reverse mortgage variant is that it necessitates only a single set of closing costs, unlike the two sets of closing costs that are incurred when a borrower purchases a home and then subsequently applies for a reverse mortgage.
Refinancing is a popular choice for those seeking to benefit from a lower interest rate, add a spouse to the mortgage, or tap into more cash as equity increases due to a rise in the home’s value. It is possible to refinance any mortgage, including a HECM, provided there is sufficient equity in the home.
Some non-profit organizations and local/state government agencies offer this type of reverse mortgage, which is intended for a specific and approved purpose, such as home repairs or property tax payments. Since only a small portion of the equity is typically utilized, the cost of this type is lower. If you’re searching for the most economical option, Single-Purpose reverse mortgages are the way to go. To locate providers who provide single-purpose reverse mortgages, check with local aging agencies to see if home repair loan programs are available in your area.
Senior homeowners with high-value properties who wish to access a greater portion of their equity may find the federally-set borrowing limit of the HECM (which is based on the home’s value up to $970,800) to be limiting. To cater to this group of homeowners, there is another type of non-FHA reverse mortgage called the proprietary reverse mortgage. These loans are usually provided by private lending companies and banks that develop them. Although interest rates may be higher than those of HECMs, fees can be lower.
If you have decided that a reverse mortgage is the best option for you, it is beneficial to understand that you have multiple loan options to choose from to find the one that best suits your requirements. To determine which type of loan would be most advantageous for you, please contact Quintessential Mortgage Group to speak with one of our knowledgeable reverse mortgage professionals.