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Important Things to Know About Reverse Mortgages

Kalicia Bateman
Kalicia Bateman | Contributor

Retirement is meant to be spent relaxing with loved ones, golfing with lifelong friends, and spoiling your grandchildren. However, with fixed incomes, inflation, and heavy medical expenses, your hard-earned, life-long savings may seem to disappear before your eyes. In times of crisis, a reverse mortgage loan is one way many Americans are fighting back. Here at Best Company, we are determined to help you understand the benefits and drawbacks of a reverse mortgage loan, make sure you are pointed in the right direction, and find peace of mind moving forward. You should know what a reverse mortgage entails, if you qualify, and what options you have.

What is a reverse mortgage?

A reverse mortgage is a government-established program to help people approaching retirement age have a place to live and funds to support living expenses. When you pay the mortgage on your home, you are, in essence, buying part of your home back from the bank that loaned you the money. Once you have made all your mortgage payments, you own 100 percent equity in the home, meaning if you sold it you would keep 100 percent of the profit minus paying the real estate agent. The borrower can trade some of that home equity for a loan while still continuing to live in the home. The borrower will not have to repay the loan until they move from their home or pass away. For more information, read our simple guide to reverse mortgages.

What happens when someone has paid off their home, is retired, and suddenly falls on hard times? 

Reverse mortgage loans open up another source of retirement funds. This program makes it possible to trade the home equity you already own for cash. At many reverse mortgage companies, you can get the loan in a lump sum or through monthly payments. After you take out the money, you may continue to live in your house and you will not be required to repay the loan to the company until you die or move. Once you die or move from your home, you or your heirs will often sell the property in order to pay back the loan.

Do I qualify?

Individual requirements:

  • Must be 62 years old or older
  • Must own either all of their property or have a small mortgage payment
  • Must be the occupants’ primary residence
  • Must not be a delinquent or on any federal debt
  • Must meet with an approved HECM counselor

Home requirements:

  • Homes must be single-family or live in a 1-4 unit home and occupy one of the units
  • Homes must be U.S. Department of Housing and Urban Development(HUD) approved
  • Homes must meet Federal Housing Administration(FHA) requirements

What are my options?

There are several types of reverse mortgages you can consider.

Home Equity Conversion Mortgage (HECM): This is the most basic reverse mortgage package. This program is also often considered the safest option. Government regulations ensure that customers are protected within the HECM program. Reverse mortgage counseling is also required in an HECM reverse mortgage.

Proprietary Reverse Mortgages: Proprietary reverse mortgages are created specifically by reverse mortgage lenders to give different clients better rewards or incentives to join their company. Rather than using the traditional HECM program, these companies offer different incentives, pay plans, or rates to ensure you are getting the best deal for your situation. These deals can be great but do not offer the same protections as the HECM model. To explore proprietary reverse mortgages in-depth, check out the company links.

How much money can I receive from a reverse mortgage?

The maximum amount someone can receive on a HECM is $679,650. Although this is also the most someone can receive in a mortgage loan. Many factors contribute to each individual’s case:

Value of home: The value of the home property is one of the biggest determining factors for the amount of money you can receive. 

Age: The older you are, the more you can receive for your reverse mortgage. A 62-year-old will get less money than someone who is 90 years old.

Interest rates: Interest rates are ever-changing; ask your lender for the current interest rate. Rates are usually adjustable rates, but some reverse mortgage lenders offer fixed rates.

Choice of distribution: Though you have the option on how to receive the loan, some options can be better than others. A line of credit tends to give you the highest possible proceeds, but payments come overtime. A lump sum gives you the money faster, but fees may apply.

What fees are involved?

Almost all of the fees for HECM can be financed and paid from the proceeds of your loan. You will not have to pay for them upfront, but the amount available to you will be reduced.

Traditional fees: Those who get a reverse mortgage must be willing to pay property taxes, homeowners insurance, and home maintenance costs.

Origination fee: These vary, but they are all capped by the Federal Housing Administration so no one can go higher than these rates. Many mortgage lenders will give you rebates or deals, so these fees may be even less.

To calculate the maximum origination fee:

  1. If your home is under $125,000, the fee has a maximum cost of $2,500.
  2. If your home is between $125,000, and $200,000 the deal is 2 percent of the property.
  3. If your home is over $200,000, then the lender can charge 2 percent on the first $200,000 and then only 1 percent on anything over that.
  4. If you own a home that is $500,000, you would be charged 2 percent for the first $200,000 and then just 1 percent on the remaining $300,000.

Note: Maximum Origination Fee is $6,000
Reverse mortgage counseling fees: This fee is totally dependent on the counselor. You should always be informed of the price before setting up a meeting, but the price usually is around $125 dollars.

Third-party charges: Closing costs from third parties can include an appraisal, a title search and insurance, inspections, surveys, recording fees, mortgage taxes, credit checks, and other fees. These tend to cost between $1000 and $2000.

Servicing fees: These are fees that ensure you are keeping up with your insurance payments and other documents. It costs, at most, $35 a month, and may be added to the monthly interest rates.

How do I choose a reverse mortgage company?

You have many options to choose from when looking for the best fit. As you research, make sure to fully explore the different options that each company offers, the deals they are willing to make, and how willing they are to help you find comfort, security, and freedom.

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Reverse Mortgages Frequently Asked Questions

What is the best reverse mortgage company?

Finance of America Reverse has earned the top slot because of low origination fees, a variety of services, and a high overall rating from consumers. 

View other top reverse mortgage companies.

Why do people get a reverse mortgage?

People get a reverse mortgage for many reasons. Traditionally, people over the age of 62 have used this as another retirement income along with social security. However, many people are tapping into their hard-earned assets in order to enjoy retirement more or to use this typically tax-free option to invest in something else.

  • It may be right for you if are going to be receiving enough money from the reverse mortgage company to solve your current financial problems. This requires reaching out to companies and doing a little digging to see where you qualify. Click here for a list of verified reverse mortgage company reviews.
  • It may be right for you if you are not planning to move anytime soon. This is important to consider because if you move soon after you take out the reverse mortgage, you will not be able to take full advantage of the loan and, in this case, the upfront fees will likely not be worth it.

Overall, getting a reverse mortgage is a personal decision that requires thought, research, and consideration of the pros and cons. Look at all the aspects of your particular situation in order to determine if a reverse mortgage is the right decision for you.

Should I be considering a reverse mortgage?

If you qualify for this program, it is always wise to look into it. Whether you are financially struggling or just looking to see how much money you could make, it is always smart to explore your options.

There are many factors that play into whether or not a reverse mortgage will be right for you. Micahel Drake, owner of PMG Loans asserts that,Reverse mortgages can be a good idea in situations where someone owns a property with significant equity and is looking for a steady stream of income. A reverse mortgage can be a quality opportunity to be able to enjoy your years of retirement by turning an asset you have into cash.

To some, turning your home equity into cash may be seen as limiting to your heirs because they will not inherit as much from the family home. While this is important to consider, it is also valuable to look at it in a different light. If you are struggling to make ends meet, taking out a reverse mortgage can grant you more financial independence and lighten your children’s financial burden of helping with your financial constraints.

For a reverse mortgage to make sense for you, you must be in a position where you can continue to pay all the fees that come along with owning a home besides your monthly mortgage, which will be covered by the reverse mortgage company, even if you use part of the reverse mortgage loan to pay off these fees. If you are not going to be in a position to do this, even after you receive the loan, a reverse mortgage may not be a good fit for you.

Are reverse mortgages worth it?

More and more people are understanding and utilizing a reverse mortgage loan. Not only is it a program to help those who are financially unstable, but it may interest those who want to retire early, buy a new home, or plan to stay in their current residence until they pass away.

For many people, their homes are a primary asset. This is one way to get money fast in order to pay for more immediate needs, such as college for grandchildren or sudden health problems. Just be aware of the fees and other expenses. Many companies have a high origination fee and it is important to note that even though you will not have to worry about monthly mortgage payments you will have to pay for other home related fees, such as homeowner's insurance and property taxes.

What happens if I move and have a reverse mortgage on a house?

The loan is not due back until the last living person on the loan moves or dies. At that point, many people sell the home to pay off the loan, and even if they can’t sell the home for as much as the loan was for, the FHA has policies in place to protect you and your family.

Why do people view reverse mortgages as bad?

Many people wonder why reverse mortgages have a negative connotation to them. The reason is simple, this option is often someone's last option for financial freedom. In many cases, they have run out of money and use this as a necessary source of income. Though this is true, many are now using reverse mortgages to free up assets, buy a nicer home, or have a more enjoyable retirement. Below list out a few cons of reverse mortgages:

  • If you vacate the home for more than a year, the loan will be due. This could be due to unforeseen health problems that require you to move into a nursing home, for example. When you suddenly vacate the property, you will only have six months to pay off the loan.
  • Your children’s inheritance will be smaller if you are planning on leaving your home to them.  Dr. Guy Baker weighs in by saying, “Family members have to be onboard when a reverse mortgage is taken out on the family home. The kids need to see the reverse mortgages as a way they can avoid having to pay their parent’s living expenses, rather than as a loss of inheritance.” In a reverse mortgage, you are using equity that you already have in your home to receive a loan. When you pass away or move, the reverse mortgage company will get the proceeds from the home in the amount that you owe them, and your children will receive whatever is left over.
  • The upfront fees are high compared to other kinds of loans. There are many upfront costs that come with a reverse mortgage. Among other fees, these can include an origination fee, real estate closing fees, and an initial mortgage insurance premium.
  • The flexibility of not having to constantly repay the loan can hurt you in the end by having large fees included in the loan. Ongoing costs can be high because you are charged interest and fees for the current month’s loan as well as the interest and fees that were added to the other month’s loans. Some of the ongoing costs included in a reverse mortgage are interest, servicing fees, annual mortgage insurance premium, property charges, etc.
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