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As a senior, your most significant asset may be your home. If money is tight in retirement, you may be interested in getting a reverse mortgage. Here, we'll discuss everything you need to know about reverse mortgages so you can make the best decision.
With a traditional mortgage, you take out a loan to finance a home and pay your lender back over time by making a monthly mortgage payment. A reverse mortgage works the opposite way -- instead of making a monthly payment, you receive payments based on your home equity. This option is only available to older homeowners who meet eligibility criteria, which we'll discuss below. You might also hear a reverse mortgage referred to as a home equity conversion mortgage, or HECM.
With a reverse mortgage, you enter into an agreement where a lender pays you based on your equity in your home. Your lender doesn't take ownership of your home, and you're still required to cover the costs associated with it, like property taxes, homeowners insurance, and other maintenance costs or expenses. You can use the money from a reverse mortgage for any purpose -- it doesn't have to relate to your home.
As a borrower, you have a few options when it comes to receiving your reverse mortgage proceeds:
You'll need to consider your specific needs when determining which option is best for you.
There are certain criteria you'll need to meet to qualify for a reverse mortgage, according to Steve Irwin, President of the National Reverse Mortgage Lenders Association (NRMLA):
The amount of money you can get from a reverse mortgage loan depends on your age and the value of your home, as well as the current interest rate and the type of reverse mortgage you get. However, you shouldn't expect to get the cash equivalent of the full value of your home. Rather, you'll get just a portion of it.
Just as there are closing costs associated with a regular mortgage, so too will you pay a number of fees when you enter into a reverse mortgage agreement. First, there's a loan origination fee, which is either $2,500 or 2% of the first $200,000 of your home's value -- whichever is higher. From there, you'll pay 1% for any amount of home value over $200,000. The maximum fee you'll pay is $6,000.
You'll also need to pay for an appraisal and a compulsory housing counseling session. Plus, you should factor in mortgage insurance premiums -- specifically, 2% at closing plus an annual fee equal to 0.5% of your loan balance.
You may also be on the hook for monthly loan servicing fees that top out at $30 for fixed-rate loans and $35 for adjustable-rate loans. And there may be some additional third-party fees you're charged at your lender's discretion.
There are different reverse mortgage types you might choose from:
A reverse mortgage is an excellent idea for some people -- but not everyone. Here are the pros and cons of getting a reverse mortgage.
There are some advantages to a reverse mortgage:
On the other hand, reverse mortgages have their drawbacks.
The reverse mortgage industry has long been blasted for its predatory practices. In fact, low-income areas are often targeted in an effort to get desperate homeowners to sign up. To avoid falling victim to a scam, you're better off reaching out to lenders about a reverse mortgage rather than responding to unsolicited offers. You should also avoid signing any contracts or documents you don't understand. If you have questions about the process, reach out to the Department of Housing and Urban Development at 1-800-347-3735.
It can be. With a reverse mortgage, you get access to income without having to sell your home and move. If you're a senior homeowner with a lot of equity in your home, it could be an easy way to borrow. Just be aware of the drawbacks before moving forward. You may decide that you're better off with a home equity loan or line of credit than a reverse mortgage. Or, you may decide that the cost of owning your existing home is too high, even with those reverse mortgage payments. There's no right or wrong answer, so ultimately, it will boil down to your financial needs and what you're comfortable with.
The NRMLA offers additional information and resources at ReverseMortgage.org, including:
Here are some other questions we've answered:
A reverse mortgage is a loan that allows you to get paid by a lender based on the equity you have in your home.
With a reverse mortgage, you either receive a lump sum of cash, a line of credit, or monthly payments based on your home equity and other factors.
Like any loan, if you come into money, you can use it to repay a reverse mortgage. But most seniors take out a reverse mortgage because they're extremely strapped for cash, and so you may need to eventually sell your home to pay off that debt.
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