What You Need to Know About a Reverse Mortgage and If You Should Get One

By  //  January 18, 2022

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What is a Reverse Mortgage?

A reverse mortgage is a type of loan that uses the home as collateral. The reverse mortgage was created in 1961 by the United States by an East coast-based bank before being permanently adopted by the US Department of Housing and Urban Development over fifteen years later. A reverse mortgage works in reverse of a typical mortgage.

It allows homeowners 55 years or older (previously 62) to use their home as collateral for the loan. Most homeowners will use a reverse mortgage to pay off their current mortgage (if any) or supplement their retirement income.

The loan allows homeowners to borrow money with the equity they have in their homes. Unlike most loans, reverse mortgages do not require repayment until the end of the loan’s terms. This is typical if a homeowner sells the home, moves, or dies. 

Types of Reverse Mortgage Loans

Reverse mortgage loans are available in three types: single-purpose reverse mortgage, federally-insured reverse mortgage, and proprietary reverse mortgage. 

Single-purpose Reverse Mortgage:

This is the most inexpensive but rarest form of a reverse mortgage. They are typically offered by a local or state agency which allows for lower prices. Single-purpose reverse mortgages are also occasionally offered by nonprofits and generally are lower in interest and fees than the other two types. Not every state will have this type of loan and cannot be used for any purpose. Lenders are allowed restrictions for how the loan can be used since the loan is for a single item. It is typically used to address one problem, such as repairs or taxes.

Federally-insured Reverse Mortgage: 

This financial product is backed by the United States Department of Housing and Urban Development. A home equity conversion mortgage is the only federally-insured mortgage, as is often referred to as a HECM. They tend to be more expensive with a higher upfront requirement than other home loans. These costs are associated with the lack of limitations on the loan’s usage and the owner’s income. 

Non-complimentary counseling will be necessary before application since there is much-associated knowledge surrounding cost and payment options with this loan. The session typically costs $125.

The value you can borrow will depend on your age, home equity, and interest rate. If you are curious about the possible size of your loan but not committed to counseling, you can also use an online reverse mortgage calculator for a rough estimate. People who are older with more equity will typically qualify for a higher loan. Those who own their house in full will receive the best rates and highest loan amount. 

There are multiple forces of payment options for this type of loan. 

It may also be necessary to look into getting a mortgage protection insurance policy to safeguard yourself and your loved ones.

Proprietary Reverse Mortgages:

Homeowners who have high-value homes typically use this form of reverse mortgage loans. Proprietary reverse mortgages are backed by private lenders and are for homeowners who seek a higher loan due to their high-valued homes. Private lenders may allow a client to qualify for a higher reverse mortgage if their home is valued at more than the 2022 lending limit of $970,800. 

Prospective clients who have a low mortgage balance or a paid-off home will qualify for larger funds. Counseling may be required, but it will vary depending on the lender, and the session may help you decide if it is more beneficial to go with a HECM reverse mortgage or a proprietary reverse mortgage. Proprietary reverse mortgages also have more than one way you can receive your payment. 

Proprietary reverse mortgages do not require an upfront payment or mortgage insurance premiums because they are private lenders. This mortgage type typically has a large variance in interest rate since the lenders are all private. Comparing interest rates among proprietary reverse mortgage lenders and HECM providers will be the best way to determine if the lender is right for you. 

Should You Get a Reverse Mortgage? 

Reverse mortgages are a popular financial product in the United States created to help homeowners who are 55 and older create income from the equity within their homes.

If your situation is one that can benefit from a reverse mortgage, it is something you should consider. Financial situations can often become complex when you are older. Reaching out to a financial advisor or a counselor is the best way to determine if you should get a reverse mortgage. 

There is No Discrimination Allowed in Reverse Mortgage Lending

Like many things in the United States, there is no tolerance for discrimination for mortgage lending. If you believe the lender discriminates against you based on your age, sex, religion, or other factors that can be considered discriminatory, be sure to take action. You can begin by reporting the lender to the Consumer Financial Protection Bureau.