When it comes to obtaining a mortgage loan, most homeowners tend to think in terms of what's known as forward mortgages such as conventional, FHA, VA and USDA loans.
If you are 62 years old or older, however, you may have another powerful option known as a "reverse mortgage" at your disposal. Further, you are never too old for a reverse mortgage.
What is a reverse mortgage?
A Home Equity Conversion Mortgage (HECM), more commonly known as a "reverse mortgage," is a loan available to homeowners, 62 years or older, that allows them to convert part of the equity in their home into cash.
This cash is then paid to the homeowner in the form of monthly payments, or in a lump sum.
Reverse mortgages became a government-regulated program, insured by the FHA (Federal Housing Administration), in the 1980's. These loans were established to help senior homeowners with limited income to cover basic monthly living expenses and pay for health care. However, there is no restriction on how borrowers use the proceeds from their reverse mortgage.
Qualifying for a home equity conversion mortgages
Fortunately, reverse mortgage qualifications are fairly straight-forward.
The amount that can be borrowed via a reverse mortgage is based on the borrower's age, home value, and the interest rate offered by a lender. Generally, the older a person is and the more their home is worth, the more they may receive.
In addition to meeting the minimum age requirement of 62 years old, other qualifications include:
- Homeowners must use the home as their principal residence
- A low mortgage balance (or when purchasing a home, a sizable down payment) is needed
- Applicants must complete a financial assessment, and meet with a HUD-approved reverse mortgage counselor
How reverse mortgages work
Unlike traditional mortgage loans, homeowners receive monthly payments from their lender. The monthly payment is generally based on the percentage of accumulated home equity.
The repayment of the loan doesn't occur until the homeowner sells the loan, permanently moves out, or passes on.
The money paid to the homeowner can be used for any reason. Retirees typically use the cash to supplement their income, pay for health care expenses, pay off debt, or finance home improvement jobs.
Jim Losito of Retirement Funding Solutions in the Greater Atlanta Area, says reverse mortgages can be a great option for any homeowner over the age of 62, and function much like a home equity line of credit.
According to Losito, while there's no limit to how old you can be, the average sweet spot tends to be in the late 60's to early 70's.
Losito goes on to say that although many homeowners think of reverse mortgages for the purposes of refinancing, HECM loans are also great for retirees looking to purchase a home.
Reverse mortgages can be good loans because they allow seniors to use their housing wealth for two things - liquidity and cash flow, says Losito.
"A zero housing payment is almost always your goal when you retire. Reverse mortgages not only give you that zero payment (excluding taxes and insurance), they do the opposite by actually increasing your monthly cash flow."
Reverse mortgages may not be for everyone
While there are many reverse mortgage benefits, it's always best to understand all there is to know about this program so you can weigh the pros and cons.
The interest rates and closing costs for reverse mortgages are generally slightly higher-than-average as compared with traditional mortgages. The loan balance increases over time as the interest on the loan and fees accumulate.
The loan becomes due and must be repaid when a "maturity event" occurs. Maturity events include things such as a last surviving spouse (or non-borrowing spouse meeting certain conditions) passes away, the home is no longer considered a principal residence, or the homeowner vacates the property for more than 12 months.
The loan also becomes due if the homeowner doesn't pay their property taxes or homeowners insurance, or fails to maintain the property.
Is a reverse mortgage right for you?
Fortunately, you are never too old to apply for a reverse mortgage. If you are age of 62 or older, this program could be a great option for you or your loved one.
Regardless of your age, be sure to consult with a reverse mortgage counselor to learn everything you can about home equity conversion loans and whether this loan makes sense for you and your retirement goals.
More help from HSH.com
Reverse Mortgage Rates - Average HECM RatesCurrent rates and trends for reverse mortgages / Home Equity Conversion Mortgages (HECM).
Paying off a reverse mortgage when a parent diesIf your parents currently have a reverse mortgage, it's important to understand what happens to the debt when they pass.
Reverse mortgage protections for spouses and other household occupantsReverse mortgage borrowers may wonder what happens to others living in their home in the event of their death. Understand what protections exist for household occupants.
Reverse mortgage or HECM restrictionsBorrowers have a great deal of discretion on how to use proceeds from reverse mortgages, but interest paid isn't deductible until the loan is paid off. Learn the details.
Reverse mortgages FAQ: Very important questionsIf you still have a few lingering questions about reverse mortgages after reading this guide, it's likely you'll find the answers here.