A reverse mortgage is a loan for homeowners over 62 years of age who have substantial equity in their homes. With this loan, they can borrow against their equity and get access to cash to pay for any cost-of-living expenses they may have. Rates typically start at less than 3.5% per year, and the loan lasts until the borrower dies or moves from the property, after which they (or their heirs) repay the loan or sell the property to repay the lender.
Most reverse mortgages are government-insured programs that have stringent lending standards. Private or proprietary reverse mortgages are also available, but those are less regulated. Use caution with unregulated loans from private, non-bank lenders as there is an increased risk of scams with this option.
How Does A Reverse Mortgage Work?
It starts with a borrower who already owns a property with considerable equity --usually at least 50% of its value. Once the borrower picks a loan program with help from their loan advisor, they can apply for a loan. After a credit check, reviewing the borrower's property, its title, and appraised value, the lender can either approve or decline the application.
If the loan is approved, the lender funds it as either a lump sum, a line of credit, or periodic payments (monthly, for example), depending on the borrower's choice.
Some reverse mortgages limit how the funds are used, such as for home improvements or renovations. Others are unrestricted and can be used for any variety of life's expenses.
Reverse Mortgage Eligibility
To qualify for a government-sponsored reverse mortgage, the applicant must be 62 years old or more. Also, they can only borrow against a primary residence and must have at least 50% equity or own the property outright. There also can't be a second mortgage on the property. The following are reverse mortgage-eligible properties:
- Single-family home
- Multi-unit properties -up to four units
- Manufactured home built after June 1976
- Condo or townhome
Private reverse mortgages have qualification requirements that vary by lender.
Reverse Mortgage Costs
The two primary costs for government-backed reverse mortgages are:
- Interest rates: Possibly fixed for lump-sum payouts with rates comparable to a conventional mortgage. Variable rates are based on LIBOR, with a margin added for the lender.
- Mortgage insurance premium: Government-backed reverse mortgages have a 2% upfront insurance premium with an annual premium of 0.5%.
Mortgage insurance protects lenders in case of default. So while reverse mortgages can't default in the same way as a conventional mortgage (such as missing a payment), the loan can still default if the owner fails to pay property taxes or the insurance.
There are also origination fees, and the amount varies by lender but typically ranges from 1% to 2% of the loan amount. Lenders may also have fees for other closing costs, such as credit checks and property appraisals.
However, these are usually rolled into the loan, so you won't need to pay it upfront.
Are you a homeowner over 62 years of age? A reverse mortgage may be just the thing to have more liquid cash flow! Contact us today to learn more about your loan options.
