Reverse Mortgages Explained

Finding an affordable loan during retirement might not always be easy. But if you’re a homeowner who has already reached 62, then you’d want to consider a reverse mortgage.

It’s a type of loan that allows you to convert part of your home equity into cash. But unlike a typical mortgage, there won’t be any monthly payments. Instead, payback is due when the homeowner dies, sells the house, or moves out.

This type of loan could be appealing to retired homeowners for several reasons.

• It’s often tax-free.
• There are no monthly payments.
• You get to keep the title to the house.
• You can live in your home as long as you want.
• Government-insured reverse mortgages can protect you from property market downturns. You get to repay the market value when it’s time to pay up the loan.

But you cannot assess a reverse mortgage based solely on the merits. It’s important to understand whether and how it could serve your needs before signing on the dotted line.

Reverse mortgages explained

A reverse mortgage differs from other mortgage facilities in the way it’s structured. With traditional mortgages, the borrower makes monthly payments to purchase a house. But with reverse mortgages, the lender pays the borrower in the form of a loan. And these are typically available for homeowners aged 62 or above when they have equity in their home.

There are three types of reverse mortgages;

• Home Equity Conversion Mortgages (HECMs) that are backed by the federal government.
• Proprietary reverse mortgages that are given out by private lenders.
• Single-purpose reverse mortgages offered by certain state agencies and non-profits.

The terms and criteria of reverse mortgages will differ among lenders, as with most other loan facilities.

Principal borrowing

The principal borrowing will typically increase with the home equity available and the homeowner’s age. And depending on the lender, it could be available as a lump sum, monthly payment, or a line of credit. Lenders may also set guidelines on how you could use the loan. These can include medical expenses and home improvements.

Interest payments

Interest is typically calculated each month and added to the principal borrowing. Some lenders may charge a fixed interest while others could offer a variable rate. But you will often get a higher principal amount and better terms with variable interest. 

Mortgage-related fees

When planning to apply for a reverse mortgage, you need to factor in mortgage-related expenses such as servicing fees, closing costs, origination fees, and mortgage insurance premiums. You should discuss them upfront with the lenders and compare fees and charges before selecting the best offer available. In addition, there could be other costs like home inspections and appraisals that you’ll need to consider.

Homeownership expenses

A reverse mortgage will allow you to keep the title to your home. This means you’re responsible to bear regular homeownership costs like taxes, homeowner’s insurance, maintenance, and utilities. In fact, staying up-to-date with property tax, insurance, and maintenance are often mandatory requirements when taking a reverse mortgage.

Before you sign up

For retirees, a reverse mortgage is often an affordable loan option compared to other costly products on the market. However, before you sign up, it’s important to research all available solutions to ensure you secure the best possible deal. For instance, you might sometimes find lower interest rates with a home equity loan, provided you meet its eligibility criteria.

Then, there are the hidden clauses and unexpected events that could later leave you and your loved ones in despair. For instance, what would happen in the event of your demise? Could your loved ones repay the loan to take ownership of the property? There could be various such questions a first-time reverse mortgage borrower may not anticipate. So, it’s important to get guidance from an independent advisor to ensure that you cover all bases.

There are also reverse mortgage scams that target unsuspecting elderly homeowners. This makes it even more important to take your time and research loan products. And if the lender seems wary about explaining finer details, take it as a red flag and walk away.

Of course, managing your expenses without taking out loans might always be a more prudent option. Saving up, cutting down unnecessary costs, and living within your means could help you build a more secure financial future.

If you’re living in a rented property, check this article on how you can protect your assets.