Reverse Mortgage

A reverse mortgage is a home loan that allows homeowners ages 62 and older to borrow against part of their home’s equity.

The equity in your home is simply the difference between the value of your home, and how much you owe on your mortgage. So If your home is worth $500,000 and you have $300,000 left on your mortgage, you would have $200,000 in equity.

Unlike a regular mortgage in which the homeowner makes payments to the lender, with a reverse mortgage loan, the lender makes regular payments to the homeowner, hence the name, plus the money is tax-free.
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Homeowners who choose this mortgage option can continue to live in their homes, but the original loan must be repaid when the borrower dies, permanently moves out or sells the home.
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One of the most popular types of reverse mortgages is the Home Equity Conversion Mortgage (HECM), which is backed by the federal government.

The amount a homeowner can borrow, known as the principal limit, varies based on the age of the youngest homeowner, current interest rates, the Reverse Mortgage limit ($1,089,300 in 2023), and the home’s value.

Homeowners are likely to receive a higher principal limit the older they are, the more the property is worth, and the lower the interest rate. The amount might increase if the borrower chooses a variable-rate Reverse Mortgage.

With a variable rate, options include:

• Equal monthly payments, provided at least one borrower lives in the property as their primary residence.

• Equal monthly payments for a fixed period of months agreed on ahead of time.

• A line of credit that can be accessed until it runs out.

• A combination of a line of credit and fixed monthly payments for as long as you live in the home.

• A combination of a line of credit, plus fixed monthly payments for a set length of time.

However, if you choose a HECM with a fixed interest rate, you’ll receive a one-time, lump-sum payment.

The interest on a reverse mortgage accrues every month, and you’ll still need to have adequate income to continue to pay for property taxes, homeowners insurance and the home’s upkeep.

Typically, homeowners use reverse mortgages to supplement their retirement income, pay for home repairs or cover medical expenses. When your regular income or your available savings are insufficient to cover your expenses, a reverse mortgage can keep you from turning to high-interest lines of credit or other more costly loans.

A reverse purchase allows homeowners to use the proceeds from their reverse mortgage to buy a new home as a primary residence. This gives you the option to downsize or relocate from your current home as needed. Like a reverse mortgage, you must be at least 62 years old to do a reverse purchase.

To be eligible for a reverse mortgage, the primary homeowner must be age 62 or older. (You may find that a small number of lenders may offer options for people as young as 55).

Other eligibility requirements for reverse mortgages include:

• You must own the property outright or have at least paid down a substantial amount of your mortgage (at least half).

• The property must be occupied as your primary residence.

• You cannot be delinquent on any federal debt.

• You must continue to make payments on property taxes, homeowners insurance and homeowners association dues.

• You must participate in an information session provided by a U.S. Department of Housing and Urban Development (HUD)-approved reverse mortgage counselor.

Seniors should be careful to make the most of the loan by budgeting carefully in order to avoid running out of funds too soon and to be sure that taxes and insurance are paid as agreed.

There are different types of reverse mortgages, and each one fits a different financial need.

1) Home Equity Conversion Mortgage (HECM) – The most popular type of reverse mortgage, these federally insured mortgages usually have higher upfront costs, but you can use the funds for any purpose. In addition, you can choose how the money is withdrawn, such as fixed monthly payments or a line of credit (or both options at once). Although widely available, HECMs are only offered by Federal Housing Administration (FHA)-approved lenders, and before closing, all borrowers must receive HUD-approved counseling.

2) Proprietary reverse mortgage – This is a private loan not backed by the government. You can typically receive a larger loan advance from this type of reverse mortgage, especially if you have a higher-valued home.

3) Single-purpose reverse mortgage – This mortgage is not as common as the other two and is usually offered by nonprofit organizations and state and local government agencies. A single-purpose mortgage is generally the least expensive of the three options. However, borrowers can only use the loan (which is typically for a much smaller amount) to cover one purpose, such as a handicap accessible remodel.

Reverse mortgages aren't free and could cost you money when you sell your home. Some expenses you might encounter include:

• A loan origination fee

• Mortgage insurance premiums

• A title insurance and report

• HECM counseling

You could also be on the hook for variable expenses like appraisals, recording fees, flood monitoring and any repairs the FHA requires before approving your property. You'll be responsible for interest on the amount you borrow as well, and there could be refinancing costs if you go down that road in the future.

Most of these fees depend on the lender you choose, so, as with a mortgage pre-approval, you can shop around and find the best deal.

To streamline the application process, use our convenient online form. By providing a few basic details, you can kickstart the journey towards securing a reverse mortgage. Once submitted, your information will be forwarded to Star Financial a trusted lender specializing in reverse mortgages, who will then contact you to guide you through the remaining steps.

Embarking on the path to a reverse mortgage is a significant financial decision. By following these steps and utilizing our online form, you're taking a proactive approach to securing the financial freedom a reverse mortgage can offer.

Reverse Mortgage: What it is and how it works