Why Choose A Reverse Mortgage
Reverse mortgages have helped many home owners over age 62 access their home equity and turn it into cash.
What is a Reverse Mortgage?
A reverse mortgage is different than a traditional forward mortgage. With a forward mortgage, you make payments to a lender, which gradually decreases your principal balance and increases the equity in your home. Alternatively, with a reverse mortgage, the lender makes payments to you, and with each one, your loan balance grows.
Reverse mortgages do not require any monthly mortgage payments* and no payments on the loan are required until the last remaining borrower passes away, moves out, or sells the home. However, borrowers may choose to make periodic payments to offset the growth of the loan balance if they desire. Additionally, reverse mortgages do not have any prepayment penalties.
Reverse mortgages are non-recourse loans, which means you or your estate will never owe more than your home is worth at the time the loan becomes due, thanks to the federal mortgage insurance premiums associated with the product.
*Borrowers must maintain the property and keep current property taxes, homeowner’s insurance and HOA dues.
The Different Types of Reverse Mortgages
Home Equity Conversion Mortgage
The most popular type of reverse mortgage is a Home Equity Conversion Mortgage (HECM), which has been around since the late 1980s and is the only option insured by the Federal Housing Administration (FHA).
Proprietary
While these mortgages are not federally-insured, they are insured through private investors. This type of reverse mortgage is good for borrowers with high value homes. They can also be offered in most states for borrowers who are at least 55 years old. These reverse mortgages still offer many of the same reverse mortgage benefits found in HECMs, like no mandatory mortgage payments.
Reverse Mortgage Qualifications
- The borrower must be at least 62 years of age.
- The borrower must be listed on the title of their home and plan to live in it as their primary residence. Borrowers must continue paying property taxes, home owner’s insurance, and applicable home owner association (HOA) dues.
- A financial assessment is required to ensure that the borrowers can afford to maintain the home and stay current on all property taxes and insurance throughout the life of the loan.
- The property must be in good condition.
- All borrowers must attend a counseling session with a third-party, HUD-approved counselor. This counseling session ensures the program is right for the borrowers and their specific situation and that they understand the program.
- Many property types are approved with the program, including single-family homes, 2-4 unit properties where the borrower occupies one unit, FHA-approved manufactured homes, and FHA-approved condominiums.
How Does the Reverse Mortgage Process Work?
Step 1: Research
Make sure you understand how reverse mortgages work to determine if one makes sense based on your needs and preferences. You should also research at least three different lenders to compare rates and see what past customers have to say in their online reviews.
Step 2: Counseling
These sessions are conducted by independent, third-party, HUD-approved counselors. They are designed to help you and your family fully understand the program requirements and determine if a reverse mortgage is the right choice to meet your financial goals.
Step 3: Application
Fill out the reverse mortgage application, which is similar to the application for a forward mortgage, and include all necessary documentation.
Step 4: FHA Appraisal
An FHA appraisal will be conducted on the home to establish its value and determine any repairs that may need to be completed to comply with program property standards.
Step 5: Underwriting
Underwriters will review your application and documentation to address issues and clarify any concerns.
Step 6: Closing
Review and sign the closing documents, choose disbursement options, and pay off the old mortgage on the home, if one exists.
Step 7: Disbursement
Within a few days of closing, the loan proceeds will be disbursed based on your selections you made. Options for disbursement include a line of credit, a lump sum to your bank account, or monthly payments, which will begin on the 1st of the following month.
Prefer to talk through these steps with an expert?
How to Receive Your Reverse Mortgage Proceeds
When you choose a reverse mortgage with an adjustable rate, also known as an ARM, there is flexibility on how you can receive your loan proceeds. Keep in mind, regardless of how you receive your proceeds from a reverse mortgage, they are non-taxable since they’re considered loan advances instead of income. Also, proceed options can be changed at any time throughout the life of the loan for a small fee to your servicer. Here are different ways you can choose to receive your funds:
Lump-sum
Receive a large portion or all of the loan proceeds at once when the loan closes.
Monthly payments
You can receive monthly payments for life called “Tenure payments.” These payments are insured by the federal government and will continue until the last borrower passes away as long as the loan obligations are met. Borrowers can also set up monthly payments for a set period of time. This may be a good option if you are delaying taking your Social Security payments until you are older.
Line of credit
You can take out loan proceeds as needed, and you’ll only pay back what’s borrowed. The line of credit experiences a growth factor that is equal to the monthly interest plus the .5% ongoing FHA mortgage insurance premium.
Combination
You can choose to combine these options to best meet your needs! You can establish a line of credit and also receive monthly payments. Or, you can choose to take a lump sum at closing and put the rest into a line of credit.
If you choose to get a reverse mortgage with a fixed interest rate, your only disbursement option is to receive all your loan proceeds at the time of closing in a lump sum.
How to Decide if a Reverse Mortgage is Right for You
There are several scenarios to consider when deciding whether you should apply for a reverse mortgage.
A reverse mortgage may be a good option if you’ve paid down your mortgage balance over the years and have built up a substantial amount of equity in your home but you don’t qualify for other loan products such as a home equity loan, home equity line of credit (HELOC), or a cash-out refinance.
Additionally, you might want to consider a reverse mortgage if you plan to remain in your home for many years and you’d like to supplement your retirement income.
Are you wondering if a reverse mortgage is right for you and your family? Do you have questions? Whatever you need, an experienced reverse mortgage professional at Cherry Creek Mortgage is standing by to help!