Unlike a HELOC (Home Equity Line of Credit), a reverse mortgage is known as a HECM (Home Equity Conversion Mortgage). Both allow you to unlock the equity in your home, enabling you to pay off an existing mortgage or other debt, make home repairs, or have funds available for future financial needs. The main difference is that a reverse mortgage does not have a monthly repayment requirement.
This means you can sleep like a baby, even if you don’t have the funds to make a mortgage payment this month...or next month.
The closing costs of a reverse mortgage are calculated or based on the appraised value of the home. Because a reverse mortgage is a loan, you’ll also incur the same types of fees you would with any other type of home loan—such as an appraisal fee, mortgage insurance premium, credit report fee, flood certification fee, escrow fee, underwriting fee, inspection fee, and other closing costs. Fees (with the exception of the HUD counseling fee) can be rolled into the loan, if you’d rather not pay them upfront.
For an FHA-insured loan, you must be at least 62-years-old, and while some instances allow an NBS (non-borrowing spouse) to be listed on the loan, only the actual borrower(s) may draw funds. Some Jumbo loans only require you to be at least 55-years-old.
As long as you have enough equity in your home, you can use funds from a reverse mortgage to pay off your existing mortgage.
Entering into a reverse mortgage is a commitment that HUD wants to ensure you understand from an impartial point of view. In some cases, you can complete counseling over the phone. It just needs to be done through a HUD-approved counseling agency, which we’re happy to help you locate.
A reverse mortgage has its pros and cons. The bank typically receives more interest on reverse mortgages than they do on conventional loans or HELOCs. This is because each time you don’t make a payment, that amount is added to your balance, and the interest is determined based on that balance. The higher the balance. The higher the compounded interest.
In addition, you’re still responsible for paying property taxes, homeowner’s insurance, etc.
However, one of the pros of a reverse mortgage is that generally you’re not required to repay any additional loan balance in excess of the value of your home.
A reverse mortgage requires no minimum on your home’s value nor is there a minimum requirement for how much you can withdraw. The FHA (Federal Housing Administration) calculates your principal loan limit on either your home’s appraised value or $970,800 — whichever is lowest.
If your spouse is on the loan as a co-borrower, he or she will still be able to remain in the residence free from any obligation of making monthly mortgage payments.
To put it candidly, when the last remaining borrower dies, heirs are given up to 12 months to repay the loan or agree to sell the home; the proceeds are used to repay the loan with any remaining funds belonging to the heirs.
Typically, if a non-borrower wants to remain in the home, he or she has the option to refinance in order to pay back the loan.
This is when deciding whether to apply for a reverse mortgage gets personal. Reverse mortgages use up the equity in your home, which means there may be fewer leftover assets in the end. The upside is that your heirs generally have the option to keep the home, if they desire, and won’t be held responsible for more than what you owe on the loan or more than the appraised value of the home.
Oftentimes, heirs choose to sell the home to repay the loan. They also have the option to pay back the loan in other ways (such as refinancing) if they want to keep the home.
It’s possible for your home to build equity that can be left to your heirs, but due to how volatile the real estate market is, you’d be wise to avoid any advisor who tries to use this as a selling point.
Now is not the time to make an impulse purchase. Ask questions. Do research. With us as well as our competitors...so you feel confident that you’re making an informed decision and that you’re the one in control of your financial future.