A reverse mortgage is a loan that allows homeowners aged 62 and older to access the equity in their home without having to make monthly mortgage payments. Unlike a traditional mortgage, the loan is repaid when the borrower dies, sells the house, or moves for at least 12 months. Home Equity Conversion Mortgages (HECM) are the most common type of reverse mortgage and carry a series of one-time fees and ongoing costs. When any of these cases occur, the reverse mortgage loan matures and is payable.
The most common method of repayment is to sell the house, where the proceeds from the sale are used to repay the loan in full. Usually, you or your heirs will assume responsibility for the transaction and receive all of the remaining equity in the home after repaying the loan. Interest and fees are added to the loan balance each month and the balance increases. Mortgage insurance premiums paid by borrowers go to a fund that covers lender losses when this occurs.
As with an FHA loan, you'll have to pay a mortgage insurance premium (MIP) with an HECM. You can borrow up to 60% or more if you're using the money to pay off your term mortgage. Since reverse property mortgages are not federally insured, you won't need counseling to qualify, nor will you pay monthly insurance premiums. All costs are usually included in the mortgage balance, so lenders don't have to pay them out of pocket.
Supplementing retirement income, covering the cost of necessary home repairs, or paying out-of-pocket medical expenses are common and acceptable uses of reverse mortgage income. However, it's important to be aware that interest rates on reverse mortgages tend to be higher, which can also increase your costs. Some reverse mortgage sellers may suggest ways to invest your reverse mortgage money, including pressuring you to buy other financial products, such as an annuity or long-term care insurance. If you buy those types of financial products, you could lose the money you get from your reverse mortgage.
It's important to remember that lenders are evaluating your willingness and ability to meet your obligations and mortgage requirements when considering a reverse mortgage application. This is especially true if you act as if a reverse mortgage is a solution to all your problems, pushes you to apply for a loan, or have ideas about how you can spend your money on a reverse mortgage. Read on to learn more about how reverse mortgages work, how to qualify for a reverse mortgage, how to get the best deal for you, and how to report any fraud you may see.