Reverse mortgage: everything you need to know



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If you’re 62 (or more) and own your home long enough to accumulate some capital, there is a way to turn your capital into cash to fund home renovations, medical expenses, or even extra income: a reverse mortgage. … Unlike the traditional “forward” mortgage that you use to To buy a house – there are no recurring payments on a reverse mortgage loan.

Trick? You, your spouse, or your property will eventually have to pay back the loan amount – as soon as you stop owning the property. Read on to find out more about reverse mortgages and if it’s right for you.

What is a reverse mortgage?

A reverse mortgage is a type of loan offered to seniors who have reached the age of 62 and have a sufficient amount of home equity, which is the difference between what is owed and the current value of the home. A reverse mortgage converts this capital into payments. This money is not taxed because it is considered an extension of the loan and not income.

As long as you live in the home, you do not need to return the money and you retain ownership of the home. But someone will have to return it when you move, sell your property, or die. This can sometimes mean that you have to sell the house to pay off the loan.

With a traditional mortgage, you pay the lender. However, with a reverse mortgage, the lender pays you. The amount of money you can borrow against your home equity depends on variables including your age, home value, interest rates, and loan limits set by the government

Reverse mortgage claims

Not everyone is eligible for a reverse mortgage. To qualify, you must:

  • Be 62 or older
  • Keep up with property taxes
  • Look after your home and keep it in good condition
  • Pay for home insurance
  • Live at home
  • Have sufficient capital – usually 50% or more.

Types of reverse mortgages

There are three types of reverse mortgages with different conditions, requirements, advantages and disadvantages. This is how they stack up.

Single Purpose Reverse Mortgages

This type of reverse mortgage is not offered everywhere, but it is generally the least expensive option. Single Purpose Reverse Mortgages are provided by local and state governments and nonprofit organizations, typically for low to moderate income homeowners. These types of loans can only be used for specific purposes determined by the lender. For example, you may qualify for a single purpose reverse mortgage, provided that it will be used to renovate your home.

Equity Conversion Mortgage

These reverse mortgages, supported by the US Department of Housing and Urban Development, are among the most common. Until equity conversion mortgage have higher upfront costs, they are popular because there are no restrictions on how borrowers use the proceeds, and there are no medical restrictions or income requirements. Borrowers are required to comply with an advisor however, review the costs, requirements and responsibilities of HECM. In 2020, the borrowing limit for HECM was increased to $ 822,375 from $ 765,600

Own reverse mortgage

Unlike single-purpose loans and HECM loans, these types of loans are private and not funded by the government. Own reverse mortgages are beneficial if your home is valued above the HECM limit of $ 822,375.

Benefits of a reverse mortgage

The # 1 advantage of reverse mortgages is that it helps borrowers meet their specific financial needs. But here are a few more pluses:

  • No monthly mortgage payments: You can avoid monthly mortgage payments if you have at least 50% of your home equity. However, you will still have to pay property taxes and homeowner’s insurance and keep the house in good condition.
  • Saved from foreclosure: Obtaining a reverse mortgage allows you to access the funds you need to avoid foreclosure.
  • Total amount: Depending on the type of reverse mortgage you get, you can spend the money however you want.
  • Housing for a spouse: If the spouse was not involved in obtaining the reverse mortgage, in most cases they can stay in the house even after the death of the borrower. They will have to pay taxes and insurance.

And the cons …

  • FraudA: Just as there are many legitimate reverse mortgage offers, there are also many illegal scams. If you believe you have encountered a reverse mortgage fraud, report it to your lender and file a complaint with the FTC and your state attorney general’s office. To follow these tips from the FBI to avoid reverse mortgage fraud.
  • Loans secured by capital: When you take out a reverse mortgage, you are borrowing capital, which you probably worked hard to get. This can affect not only your retirement funds, but also your ability to receive other loans. It also leaves fewer assets for your heirs.
  • Over time, you will need more: This is because the interest on your loan increases over time. And interest rates can change. Most reverse mortgages have variable interest rates.
  • Other payments: Just because you don’t have to pay your mortgage doesn’t mean you can live in your home for free. As part of your loan claim, you will need to continue to pay property taxes and home insurance.
  • Fees and closings: Like other refinancing options, a reverse mortgage has a closing cost and fees that you will have to pay. Ask your lender to estimate how much they will be.

Alternatives to reverse mortgages

Refinance your home

While you essentially start with a mortgage, you can find the best interest rate on a new home loan than on the original. You can go with traditional refinancingin which you borrow the same amount of money as the original mortgage, or you can get cashing refinancingwhere you can borrow up to 80% of the value of your home through a loan that exceeds your original size. You will receive the difference at one time.

Loan secured by equity capital

Although you will have to lend your home as collateral for a home equity loan, you can borrow a lump sum of money at a fixed interest rate. But these types of loans have higher interest rates. If you use the funds to improve or repair your home, you may be eligible for a mortgage interest tax deduction.

Sell ​​your house

While you cannot refuse to sell your home once you get the full value, you can downsize and pay cash for your new home. Just be aware that you may have to pay income tax on the sale of your home if its value has increased since the date of purchase.


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