What is a Reverse Mortgage? Should You Take One?

what is a reverse mortgage

A reverse mortgage is a loan that allows seniors 62 and older to generate income off of their homes. Reverse mortgages work by calculating the amount of equity built into your home and then lending it out to you so that you can access it without selling your home.  

For example, if you have $50,000 left on a mortgage and the home is worth $100,000, you could take out a loan to access that extra $50,000.

Reverse mortgages are perfect for seniors who want to supplement their monthly retirement income or need access to fast cash to finance expensive repairs. 

In addition, most reverse mortgages get paid off by selling the home. For this reason, a reverse mortgage is perfect for people who don’t have any heirs to leave their home to or do not plan to pay off their mortgage in full. And even if you do have a heirs, your heirs are not on the hook for a reverse mortgage so you don’t have to worry about drowning them in debt.

Now that you know what a reverse mortgage is, lets jump into some more details about them.

How Can I Cash in On My Reverse Mortgage?

There are generally four different ways that you can cash in on the equity of your home using a reverse mortgage:

  1. Annuity: The lender provides you with monthly payments that can help supplement your income. 
  2. Lump Sum: You get all of the cash available in your equity in one lump sum. 
  3. Line of Credit: You can borrow cash from your lender as needed. 
  4. Term Payments: A timeline of specified payments to be distributed over the loan course. 

Additionally, you can mix and match these terms to create a personalized loan that meets your needs. 

For example, you can sign up for an annuity plan that also comes with a line of credit to help you out in emergency situations. 

To access a reverse mortgage, you need to contact a lender to find out what programs are available for you. 

What Types of Reverse Mortgages Are Available to Me?

There are generally three types of reverse mortgages that are available for seniors. 

The first type of reverse mortgage is a Home Equity Conversion Mortgage (HECM), which HUD backs. While subject to a 2% upfront interest premium and 0.5% annual fee, HECMs allow you to use the money for any purpose. But, most importantly, if you or an heir cannot pay off the reverse mortgage, neither of you will be on the hook for the loan. Instead, the lender will have to sell the home to recuperate their losses.

There are also Single-Purpose Reverse Mortgages, which local governments and nonprofits give to fund specific projects, such as repairs. These are limited by geographic area and typically have very little to no fees attached. 

Private lenders also offer reverse mortgages that are not backed by the government, known as Proprietary Reverse Mortgages. Property reverse mortgages provide access to several different loan programs, ranging from annuities to lump-sum payments. 

While the easiest to apply for, proprietary reverse mortgages are also vulnerable to scams. Of course, finding a trusted lender will help you avoid any scams and put you into a program that is right for you. 

If you’re thinking about applying for a reverse mortgage, below you’ll find out whether or not your home qualifies for one and how to help avoid getting scammed. 

What Houses Qualify for a Reverse Mortgage?

There are four types of houses that qualify for a reverse mortgage:

  1. Single-family homes
  2. Multi-family homes up to four units or less
  3. Condos and townhouses
  4. Manufactured homes built after June 15, 1976

Each lender will set its own requirements for how much equity is needed to qualify for a reverse mortgage. Generally, most HECM loans require you to own the property outright or have most of your mortgage paid off. However, private lenders may have less strict requirements, which may be ideal for your particular situation.

When searching for reverse mortgage lenders, you should only work with a lender you trust. While reverse mortgage scams do exist, you can spot the signs of a scam and avoid them entirely by becoming better informed. 

How to Avoid a Reverse Mortgage Scam

The FBI provides a list of tips to help you avoid a reverse mortgage scam, including:

  • Seeking out a reverse mortgage counselor
  • Avoiding unsolicited offers from private lenders
  • Not signing anything you don’t understand
  • Avoiding scams from people who promise you a home without the need for down-payment
  • Not accepting money for a house you don’t own or doesn’t qualify for a reverse mortgage

By spotting the signs of a scam and becoming better informed about reverse mortgages, you can make an informed decision that best benefits your particular situation. 

Of course, once you apply for a reverse mortgage, you are not necessarily locked into one, and you can walk away from a reverse mortgage at any time if it does not feel right for you. 

Can I Walk Away from a Reverse Mortgage?

You can walk away from a reverse mortgage at any time by paying off the loan or selling your home to cover the loan. 

Additionally, you have three days after signing your loan to walk away without any additional penalty. This is known as rescission. 

If you or an heir does not wish to lose your house from a reverse mortgage, then there are many ways you can pay back the loan to avoid losing your home. 

How to Avoid Losing Your House to a Reverse Mortgage

There are two ways you can avoid losing your home or an inherited home to a reverse mortgage:

  • Pay back the loan using your savings in one lump sum
  • Refinance the home into a forward mortgage through a different lender to make monthly payments on the house

In each scenario, you will be able to keep your home, although the cost of keeping your home will often be more than it’s worth if enough fees and interest have accrued over time. 

Now you know what a reverse mortgage is, when to take a reverse mortgage and how to help prevent yourself from getting scammed if you do take a reverse mortgage.

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