If you are thinking about getting a reverse mortgage loan, there are several factors to consider to ensure sure you are getting the best deal. You should learn as much as possible about reverse mortgages in general and research potential lenders. The mortgage insurance premium should be the same among all lenders, but origination fees, interest rates, closing costs and servicing fees can vary. Educate yourself as much as possible to ensure you get the best deal on your reverse mortgage loan.
Homeowners who are at least 62 years old may be able to access a portion of their home equity and convert it into cash. Whether you’re interested in paying off your mortgage or supplementing your retirement income, a reverse mortgage loan could be the solution. Unlike a “traditional” mortgage, where the borrower makes payments to the lender, with a reverse mortgage the borrower receives payments from the lender. Generally, the loan doesn’t come due as long as the borrower lives in the home full time. When the loan does become due, it is often repaid by selling the home.
There are three types of reverse mortgage loans.1
- Single Purpose Reverse Mortgage Loans – Offered by some state and local governments as well as some non-profit agencies. These are not offered everywhere and the loan amount must be used for a specific purpose. For example, a non-profit agency might offer a reverse mortgage loan for qualified homeowners only for home repairs. Single purpose reverse mortgage loans are often available for homeowners with low to moderate incomes.
- Federally Insured Reverse Mortgage Loans known as Home Equity Conversion Mortgages (HECM) – HECMs are insured by the Federal Housing Administration (FHA). They are widely available and the funds can be used however the borrower chooses. Because the initial fees can be high, it is important to weigh the costs and benefits of a HECM loan. Someone who plans to live in their home for another 15 years will likely see a greater financial benefit than someone who will only live in the home for two more years.There are several payment options you can choose with a HECM loan:
- Term: Fixed monthly payments for a specific amount of time
- Tenure: Fixed monthly payments for as long as the borrower lives in the home
- Line of Credit: The borrower can draw from the line of credit in amounts they choose until they use up the credit
- Combination of Payment Options: The borrower can choose a line of credit and monthly payments
- Proprietary Reverse Mortgage Loans – Private loans that are backed by companies. This type of loan is typically better suited for homeowners that have higher valued homes with significant equity because these borrowers may qualify for more money with a proprietary loan.
The amount that can be borrowed with a HECM loan or a proprietary reverse mortgage loan is determined by several factors such as the age of the borrower, the appraised value of the home, and current interest rates.
Borrowers who choose a HECM loan must meet with a Department of Housing and Urban Development (HUD) approved reverse mortgage counselor. However, anyone considering a reverse mortgage loan may find this beneficial. A reverse mortgage counselor will cover the loan process and will answer any questions the borrower has. The counselor will also explain the costs associated with a reverse mortgage to ensure the borrower is completely prepared. Family members or close friends are invited to attend this meeting along with the borrower.
If for any reason you decide a reverse mortgage is not right for you, you can cancel at any point before closing. You can also cancel for up to three business days after closing. This is called the rescission period. If you decide to cancel the loan during the rescission period, you will need to notify your lender in writing. Your lender has 20 days to return any money you’ve paid up until that point for financing.
1 http://www.nextavenue.org/article/2012-01/how-get-best-reverse-mortgage-deal