As home equity has increased during the recent run-up in housing prices, inflation has pushed the cost of living up which is a problem for everyone, especially those Americans who are already retired or contemplating retirement. A tool retirees can and often use to ease the financial pinch is a reverse mortgage. But what is a reverse mortgage and how do they work?
What is a Reverse Mortgage?
A reverse mortgage is loan offered to homeowners 62 or older with equity in their homes. The loan allows borrowers to defer payment on the loans until they pass away, sell the home, or move out although interest accrues on the deferred amount. Homeowners, however, remain responsible for the payment of taxes, insurance, maintenance, and other items. Nonpayment of these items can lead to a default under the loan terms and ultimate loss of the home. FHA insured reverse mortgages have an up front and ongoing cost; ask your loan officer for details. These materials are not from, nor approved by HUD, FHA, or any governing agency.
Categories of Reverse Mortgages.
There Are Two Categories of Reverse Mortgages: (i) Federally backed reverse mortgages, which are often called Home Equity Conversion Mortgages (HECM); and (ii) traditional private reverse mortgages made by commercial lenders.
Private reverse mortgages are not backed by the Federal government meaning there more repayment risk for the lender and therefore, higher rates are typically charged. Private reverse mortgages sometimes restrict what proceeds may be used for whereas HECM loan proceeds can be used for any purpose.
Types of Private Reverse Mortgages.
Different types of traditional private mortgages have different purposes and restrictions. Some are restricted in use, and some are designed for a modern real estate market moving higher and faster than the federal government rules can keep up with.
Single-Purpose Private Reverse Mortgages. Designed more for home renovation needs, the single-purpose private reverse mortgage is a smaller financing tools intended to be used by consumers for a specific purpose. Many borrowers use this tool for remodeling a home to make it more compatible with a medical need. A single purpose could be a long-awaited trip, or it could take care of property taxes. Much depends on the program offering the single-purpose reverse mortgage and their lending rules. Non-profits typically tend to be the frequent players in this field, helping out lower-income borrowers with specific needs they otherwise can’t afford. This also fills a gap for those borrowers who may not qualify for the typical reverse mortgages available.
The HECM and How it Works. HECMs are the most popular reverse mortgage available. They allow eligible homeowners to borrow against the home they own up to $1,089,300 as of 2023, assuming the home has that much equity in it. The actual financing provided can be lent either as a fixed rate or as an adjustable one. HECM loan proceeds can be received as a:
Lump-sum payment;
Series of monthly payouts;
Line of credit; or
Combination of monthly payouts and a line of credit.
The U.S. Department of Housing and Urban Development (HUD) website contains excellent information about the HECM program. You can read HUD’s HECM page by clicking HERE.
Which is For You?
There is no default answer to the question of which reverse mortgage vehicle is for you. The individual tools vary widely, and some will work better than others for the same person at different times in life. Because private reverse mortgages come from private companies, they can fill in a market gap where the traditional HUD-backed HECM product can’t fit. This is more and more common as today’s markets push valuations higher. Where HUD programs stop eligibility at $1,089,300 as of 2023, proprietary reverse mortgages can handle loan amounts for higher figures. This would be the typical path for a jumbo loan in a reverse mortgage scenario.
If you think you would like to further investigate a reverse mortgage, I am happy to refer you to private commercial lenders I have worked with in the past who offer these loans. For more information about the HECM program, speak with a HECM counselor. HECM counselors can be found by clicking HERE or by calling (800) 569-4287 toll-free.
Jon K. Ladd - February 16, 2024
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