Although people often throw around financial terms like “reverse mortgage,” many individuals don’t understand what they mean. If you are considering a reverse mortgage, there are a few things that you should know. Here are seven things that you should know about getting a reverse mortgage.
1. The definition of a reverse mortgage
One of the most important things that you should understand is the definition of a reverse mortgage. This type of mortgage is a home loan. However, it’s a loan on top of the loan that you already took out. While this may sound complicated, it’s not. When you take out a mortgage, you make regular mortgage payments. Those payments go towards the equity of your home. A reverse mortgage allows you to take out a loan on that equity.
While an equity loan or second mortgage might sound similar, both loans have one main difference from a reverse mortgage. When you have a reverse mortgage, you don’t need to repay your loan until you no longer live in the home. Of course, if you fail to make your mortgage payments you need to repay the reverse mortgage.
2. The qualifications
Not everyone qualifies for this type of mortgage. If you want one, you need to own a home and be at least 62 years of age. You also need to have a low balance on your mortgage or own your home completely. If you have a low balance, it should be low enough that you can pay it off with the money from your loan. Another requirement is that you reside in your home and not elsewhere. Finally, you need to be able to pay tax, insurance, and other charges on your property. Before you qualify, you need to get information from a HECM counselor.
You also need to consider the type of home in which you live. Only the following homes apply:
- Single-family homes
- A two to four unit home with one unit lived in by the borrower
- Condos approved by HUD
- Manufactured homes that meet FHA requirements
Some people worry that they can’t get this type of mortgage if they didn’t by their home with an FHA-insured mortgage. However, this shouldn’t stop you from getting a reverse mortgage. You can still apply for one if your original mortgage was not insured by the FHA.
3. The differences between the types of loans
Home equity loans and reverse mortgages are often confused. But they are not the same thing. When you take out a home equity loan or a second mortgage, you need to make regular monthly payments. There are principle and interest payments to make. However, a reverse mortgage does not require monthly payments. The only things that you need to pay are utilities, insurance premiums, and real estate taxes.
4. The status of the home after it is no longer a primary residence
When you take out a reverse mortgage, you still own your home. If you sell it or move to another residence, you need to repay the cash, interest, and finance charges of the loan. After that, the money from the sale of the home is yours to keep. If you pass away, the equity in your home goes to your heirs. You won’t pass on any debt to them from the reverse mortgage.
5. The value of the mortgage
The cash value of your reverse mortgage depends on several factors. First, there’s the age of the youngest borrower. When multiple borrowers apply, the age of the youngest borrower affects the value of the reverse mortgage.Secondly, there’s the current interest rate of your mortgage. There is also the consideration of the sale price of the home.
6. The way payments work
It’s important that you understand the payment structure of reverse mortgages. When you have a fixed-rate mortgage, there is only one type of payment plan. You get a single disbursement lump sum. At the time of the mortgage closing, you get one complete payment. However, adjustable rate mortgages have more options.
If you have an adjustable interest rate mortgage, you could opt for a tenure plan. You get equal payments every month for the time that one borrower lives in the property. Another option is term. With term, you get equal monthly payments for a set amount of months. Some people opt for a line of credit. In these cases, the individuals get unscheduled payments. They can choose when and how much money they get. Of course, the line of credit only extends until there is no more credit.
Another option is modified tenure. With this option, you get a line of credit as well as set monthly payments for the time that you live in the home. Finally, modified term payments give you a line of credit and monthly payments for a term. Once the term is over, the monthly payments come to an end.