What is a Reverse Mortgage Loan?
What is a Reverse Mortgage Loan?
A reverse mortgage loan is a way to obtain cash from the equity in your home without being required to make a monthly principal and interest payment.* A reverse mortgage loan can allow you to convert the equity in your home into tax-free loan proceeds without having to sell your home, and without having to leave your home or take on another new monthly mortgage payment.
If you are a homeowner age 62 or older with sufficient equity, and are currently living in the home, you may participate in the Federal Housing Administration’s (FHA) Home Equity Conversion Mortgage (HECM) reverse mortgage loan program. The HECM is FHA’s reverse mortgage program that enables you to withdraw a portion of your home’s equity as tax free cash.
After years of paying the monthly mortgage bill, the equity you hold in your home is probably at its peak. But that equity will not put a single dollar in your pocket so long as it remains locked up in your house. Yet traditional home equity borrowing only creates another monthly payment for you. A reverse mortgage loan will give you the option to access this cash if ever needed. Of course, you continue to be responsible for the maintenance, real estate taxes, insurance, and other loan requirements.
It’s Your Money, Why Not Use It?
For years you have made monthly mortgage payments on your home. As your home has increased in value, this steady investment has grown as well. The equity you have in your home is real value that represents the thousands and thousands of dollars you have paid over the years. It’s your money.
However, for many years, there were only two ways to convert the equity in your home into cash. You could sell your home, and be required to move out and find alternative housing. Or, you could borrow against your home, and be saddled with new additional monthly loan repayments, sometimes on top of an existing mortgage.
A reverse mortgage (also known as a “home equity conversion mortgage” or HECM) is a U.S. Department of Urban Development (HUD) Federal Housing Administration (FHA) insured loan that gives you a better way of getting the money you have invested in your home, without forcing you to leave your home or take on another mortgage loan payment. In fact, a reverse mortgage may also eliminate any monthly mortgage payment you are making now. Here’s how it works…
The Lender Pays You.
A reverse mortgage is a loan against your home. But instead of cash flowing from you to the lender, it flows the other way – from the lender to you. You can take out your money four different ways:
- You can receive a lump sum of cash at closing
- You can receive cash in monthly advances that are guaranteed for as long as you live in the home and follow other lending requirements including maintaining your property and paying real estate taxes an insurance
- You can establish a line of credit that grows over time and draw on your money when you need it
- Or, any combination of the above
No monthly payments are due on a reverse mortgage loan while it is outstanding. You don’t have to pay the money back, as long as you comply with loan terms, until you and your spouse dies, sell your home, or permanently move out of your home. You are required to maintain your home and remain current on all property charges such as real estate taxes and hazard insurance.
Another unique feature of a reverse mortgage loan is its “non recourse” loan feature. You do not sign personally for the loan and you can never owe more than what your home is worth at the time the loan is repaid. If the home is “upside down” in value then HUD will reimburse the lender for any loss and not you or your estate. On the other hand, If the home is sold for more than the loan balance then the profit or equity goes to you or your estate.
Why Now is a Good Time to Consider a Reverse Mortgage Loan
The actual dollar amount available to you through a reverse mortgage loan depends on the type of reverse mortgage loan you select, current U.S. Department of Housing and Urban Development (HUD) loan guidelines, along with current interest rates and closing costs on home loans in your area. In addition, the amount varies with your home’s value and your age.
Rising interest rates may have an impact on home values not increasing significantly in the coming years as well as increasing the cost of money. That combined with world political and economic uncertainty may have a significant impact upon the maximum loan funds available to you. Nothing is worse than to regret taking action. You are encouraged to learn the facts about reverse mortgage loans and make your own educated decision if a reverse mortgage is the optimum plan to living a financially independent life.
You Still Own Your Home!
The number one myth about reverse mortgages is that you lose ownership of of your home. That is false! The fact is you remain the owner of your home. You do not give control or share the equity with the lender or government. As long as you do not fail to comply with loan terms, which could result in foreclosure, you can live in your home as long as you want and not have to pay back the loan until you decide to sell, or until you and your spouse have passed on.
Are there Restrictions on Your Tax Free Reverse Mortgage Loan Proceeds?
The primary requirement of reverse mortgage loan proceeds is to pay off any existing mortgage loans. The remaining cash you receive from your reverse mortgage loan has no restrictions.Popular uses from a reverse mortgage include:
- Pay off current mortgage
- Pay off other outstanding debts such as credit cards,
- Complete needed home repairs or desired home improvements
- Increase monthly tax free cash flow
- Pay ongoing real estate taxes and insurance
- Buy a vacation home
- Fund grand kid’s college expenses
- Healthcare needs
- Reserves for unforeseen life events
- There is no limit to what you can do.
Are there up front costs involved?
Like many traditional conventional mortgages, there are origination fees and closing costs for most reverse mortgage loans. Fortunately, these fees are typically built into the reverse mortgage loan. The common out-of-pocket expenses are the mandatory non-profit counseling session which range about $225 and the appraisal fee which usually is around $550 for a single family home.
The total reverse mortgage loan costs may vary by the type of reverse mortgage selected. You will be given a detail breakout of the estimated costs. In addition, you will receive a “Total Annual Loan Cost” disclosure required by the federal Truth-in-Lending law for reverse mortgage loans.
Get Somebody on Your Side
Although the concept of a reverse mortgage loan is fairly simple and there are many safeguards built into the process, it is still important that you investigate your options thoroughly. In fact, the U.S. Department of Housing and Urban Development (HUD) requires that eligible homeowners attend a mandatory third party non-profit counseling session before proceeding with a reverse mortgage.
A reverse mortgage loan can be an excellent way to take advantage of the equity you have built up in your home. It is important for you to get all the facts in order to make a reasonable decision about what is best for you.
Interested in learning more about a reverse mortgage in Massachusetts, Maine, New Hampshire or Rhode Island? Call Direct Finance Corp. today at 877-499-7283. Or simply complete our easy-to-use web contact form.
These materials are not from HUD or FHA and were not approved by HUD or a government agency.