Like all financial tools, a reverse mortgage loan can be absolutely right for some people. However, like all financial tools, they can be pretty confusing too. There are 3 types available and, to be sure you choose the one that's right for you, you need to know what each offers and doesn't offer. Reverse mortgage loans have been around since the 1960s but until recently, remained a very obscure form of loan. However, all that changed with the introduction of the first government-backed and insured program in 1989. But, it's not only just government backing that's making them increasingly popular, the high cost of health care, property prices and seniors becoming more financially savvy has helped bring them to prominence.
For those totally unfamiliar with this type of financial product, a reverse mortgage loan differs significantly from a home equity loan. With a home equity loan, you borrow money against the equity in your home. As you pay back the capital plus interest each month, you put back the equity in your home, eventually getting all the equity back. However, if you don't keep up the payments, you risk loosing your home. Also, anyone can apply for one and they are granted based on property value, income, borrower's health and credit score.
The only thing a reverse mortgage loan has in common with the above is that it allows you to unlock the cash that's tied up as equity in your home. But, instead of monthly repayments, the lender gives you money. The loan only becomes repayable under 3 different circumstances; you sell your home, you no longer live in the property as your principal residence, or you die.
As you take out money, the equity in your home diminishes. The insurance that comes with this type of loan means that if the money given to you eventually exceeds the equity value of your home, the lender will be given the shortfall, so the borrower is guaranteed that they will receive all money that they are entitled to as long as they continue to live in their home.
There are no health or income checks as you aren't making monthly repayments. Also, in most cases, a bad credit history will not make you ineligible. Finally, you have to be 62 or over to be eligible.
The three programs currently on offer are as follows.
HECM reverse mortgage loan
Also referred to as HUD or FHA, this is a government insured (FHA) program. The key points are that the property must be a single dwelling home or a two-to-four unit property that you own and occupy. The amount you can borrow is calculated using the value of the equity in your home, its location, current interest rates and your age. There is a maximum amount that can be borrowed; depending on the factors stated, the limit is between $200,160 and $362,790.
You can receive payments in 5 different ways; indefinite monthly payments, monthly payments for a fixed period of time, a line of credit, a combination of line of credit and indefinite monthly payments or line of credit and monthly payment for a fixed period of time.
By far, this is the most popular program on offer, with over 90% of the market.
Home Keeper reverse mortgage loan
This program is administered by Fannie Mae. It offers pretty much what an HECM does but with some key differences. Loan amount are usually smaller for couples but higher for single people. A line of credit from a HECM can grow is amount but a Home Keeper's never does. The interest rate is higher for a Fannie Mae and the amount that can be borrowed is also higher. More property types qualify, such as condominiums (thought these ust be FHA approved).
Proprietary reverse mortgage loan
This type is sometimes referred to as 'jumbo' because the loan amount can, in theory, be any size depending on the value of the home. The costs to the borrower are higher but for those with high-value homes who want to unlock more cash than they can with either a HECM or Home Keeper, this program is the best choice. Apart from these points another important one to consider is that the payments are not made monthly; you receive the payment as a lump sum or as a line of credit.
The above is a brief overview; follow the links for more detailed information on a reverse mortgage loan and find out which would be best for you, whether it is a HECM reverse mortgage, Home Keeper or jumbo reverse mortgage.
