By now, most adult consumers have at least heard of a reverse mortgage. Many also know that these loans are a way for retired adults to withdraw a portion of the equity in their homes. Still, the specifics of these loans often leave consumers with many important questions. To gain a better understanding, consumers can consult the following reverse mortgage FAQ.
Reverse Mortgage FAQ: Is There More Than One Type of Reverse Mortgage?
There are three types of reverse mortgage loans: single-purpose, proprietary, and federally insured. Single purpose loans are typically obtained through a nonprofit or government agency and must be used for a specific purpose. Proprietary loans are those obtained through private financial institutions. These are not insured by the federal government and are therefore not subject to all of the same regulations.
Federally insured loans, or Home Equity Conversion Mortgages (HECMs), are those insured by the U.S. Department of Housing and Urban Development (HUD). According to statistics released by HUD in 2010, over 90% of all reverse mortgage loans are HECMs. At this time, consumers who want a federally insured loan have two main options: the HECM Standard and the HECM Saver. The Saver was designed to be more affordable, while the Standard allows borrowers to withdraw more equity.
Reverse Mortgage FAQ: Who Qualifies for a Loan?
To qualify, consumers must be at least 62 years old, own their home, and have enough equity that any remaining mortgage balance can be paid off with the proceeds of the loan. For a consumer’s home to qualify, the property must be a single family home, a two to four unit property, an FHA-approved condominium, or an approved manufactured home. It must also be used as the primary residence.
Reverse Mortgage FAQ: What Factors Determine How Much a Borrower Can Receive?
Several factors determine how much one can receive. A person’s age, interest rate, equity, and property value significantly impact the amount that he or she may borrow. The last determining factor is the loan product one chooses. The HECM Standard allows borrowers to withdraw between 10 and 18 percent more equity than the HECM Saver.
Reverse Mortgage FAQ: How Do Borrowers Receive Their Money?
Borrowers have several different payment options available to them. Borrowers can choose to take one lump sum after closing, open a line of credit, receive monthly payments, or choose a combination of these options. The payment option one chooses will also affect his or her total payout.
Reverse Mortgage FAQ: What Can the Loan Proceeds Be Used For?
Borrowers who take an HECM will not be limited in how they may spend their proceeds. Most commonly, borrowers use the money to repay an existing mortgage loan, make home improvements, pay expensive medical bills, or supplement their retirement income. Single-purpose loans, on the other hand, must be used for a specific purpose. Through the HECM for Purchase program, a loan may even be used to purchase a new home.
Reverse Mortgage FAQ: When Must the Loan Be Repaid?
The loan must be repaid once a borrower sells the home or is no longer occupying the residence. Borrowers must also follow specific guidelines to keep their loan in good standing. To maintain the loan, borrowers must pay their property taxes, homeowners insurance, and make all necessary home repairs. Borrowers who fail to abide by these requirements will be forced to repay their loan early.
While the above information might not answer all of a consumer’s questions, these answers should give consumers a basic understanding of reverse mortgage loans. Because these loans can be complicated, education is key to obtaining a loan that will benefit the borrower both immediately and well into the future.
By Martin Fisher