What is a Reverse Mortgage?
A reverse mortgage is a loan that is available to homeowners aged 62 years and older, allowing them to borrow a portion of their home’s equity as tax-free income. Another term for these is HECM, which stands for Home Equity Conversion Mortgage. They are backed by the government and are supervised by the Federal Housing Administration. This means, they are highly regulated, and their terms are very transparent. With a standard mortgage, a borrower pays a lender each month, but in the case of a reverse mortgage, a lender pays the homeowner — hence the name. A great benefit of a reverse mortgage is that it does not need to be paid off until the borrower leaves their home. You can receive your funds as a lump sum, monthly advances, or as a line of credit. It is important to note that you will only pay interest on money you receive, so if you opt for a line of credit, you will just pay back the initial amount, without interest.
How It Works
A reverse mortgage is a great tool that can allow you to supplement your income and increase your liquid cashflow. The monthly payments frequently go towards medical expenses, paying for a child’s education, and covering the cost of house repairs. As noted above, it is only for those who are 62 years or older and who meet eligibility requirements.
Once you complete the initial steps, are approved, and have signed your closing documents, you will receive monthly payments, a lump sum, a line of credit, or a combination of these. It should be noted, however, that if you don’t have complete equity in your house, all the initial payments will go towards paying it off before you receive funds to use as you please. Even though you are getting money each month, you still own your house and retain the title to it. You do not need to pay any of the money back, including interest and closing costs, until you no longer live in the house. If you decide to sell the house, the difference between the initial reverse mortgage cost (including interest) and what you sell your house for goes to paying back the loan — you keep the rest.
Types Of Reverse Mortgages
There are several different kinds of reverse mortgages. When you meet with a loan specialist, they will help you determine the type that makes the most sense for you. In addition to this list, we recommend you read our glossary page to understand some terms you will encounter along this journey.
When you have a reverse mortgage, you must still pay interest on the loan, which is simply added to the amount you’ll pay once you move out of the house. A fixed rate mortgage ensures that your interest rate stays the same for the duration of your loan. As interest rates rise or decline nationally, your rate will stay the same. When you choose this option, you will receive your funds as a lump sum.
Annual Adjusted Rate
With this type of reverse mortgage, your interest rate will change every year. There is an annual cap of 2% on how much it can go up. This also affects the amount it can decrease. What’s more, with this option, your interest rate cannot exceed 5% over the initial rate. You can receive your funds as lump sum, monthly advances, a line of credit or a combination of these, as you see fit.
Monthly Adjusted Rate
As the name suggests, this type of loan adjusts every month. Because of this, the new interest rate takes effect immediately. The 5% cap that exists in annual adjusted rate mortgages applies to this type of loan as well. With this type, you can receive your money as a lump sum draw, line of credit, monthly advances, or a combination of these options.
This type of reverse mortgage is taken out with the explicit purpose of purchasing a new home with the funds. The difference between this and a regular mortgage is that you will not be making monthly payments on your new house. Rather, the amount that accrues will be paid once — or if — you move out of the newly purchased home.
Like a traditional mortgage, you can refinance a reverse mortgage as well. This could be a good option if your home appreciates in value, interest rates drop, or if you want to add a spouse to the mortgage. There are costs associated with refinancing, so you will need to run the numbers to make sure it is financially beneficial.
Contact Us For More Information About Reverse Mortgages
If you have any questions about reverse mortgages, please do not hesitate to contact Family Home Loan Texas by calling 1-800-990-LEND (5363). We look forward to hearing from you and helping you with every step of this process.