Features of Reverse Mortgage Loans
We have all seen advertisements for reverse mortgage lenders, usually endorsed by a celebrity. Unlike a traditional mortgage, a reverse mortgage is a type of mortgage where you retain title to your primary residence but no longer make monthly mortgage payments. The reverse mortgage loan amount you borrow must be repaid when:
- The last surviving borrower dies.
- The home is sold.
- The home is no longer used as a principal residence.
Regulated by the U.S. Department of Housing and Urban Development (HUD), Home Equity Conversion Mortgage (HECM) programs allow the borrower to live in a long-term care unit or another medical facility for up to 12 months before the loan becomes payable. An HECM program may be ideal for you if you are considering relocation to a home for older adults.
Types of Reverse Mortgage Loans
There are three basic types of reverse mortgage loans: proprietary, single-purpose, and federally insured.
Backed by private lenders, proprietary reverse mortgage loans tend to benefit wealthier homeowners. If the appraised value of your home is greater than $970,800, the limit on lending set by HUD in 2022, you may qualify for such a reverse mortgage. With a proprietary reverse mortgage, you may receive payments as a lump sum or as a series of monthly payments. While this level of flexibility in disbursement makes this variety of reverse mortgages attractive, these loans also do not require upfront or mortgage insurance premiums (MIPs).
Offered by state, local, and nonprofit agencies, single-purpose reverse mortgages are the least expensive variety of reverse mortgages. They are not available in every state, and far more restrictions are in place concerning how you may use them. As the name of the loan would suggest, they may be used for only one purpose.
Unlike home equity loans or home equity lines of credit (HELOCs), which require monthly payments, these loans do not need to be repaid until:
- Ownership of your home changes,
- The borrower dies, or
- The borrower moves to a different residence.
Federally insured reverse mortgages tend to be the most widely used of the three varieties of reverse mortgage loans. As mentioned above, HECM loans are backed by HUD and insured by the Federal Housing Administration (FHA). While they are more expensive than traditional home loans in terms of higher upfront costs, they carry no income restrictions or medical requirements. HUD-approved HECM loans may still appeal far more to you because they can be used for any purpose, such as living expenses, home repairs, or for healthcare costs.
As you consider a reverse mortgage, be aware that:
- Lenders generally charge origination fees and other closing costs for a reverse mortgage. Lenders may charge servicing fees during the term of the mortgage. The lender sets these fees and costs. The loan proceeds you receive are not tax deductible, income.
- The amount you owe on a reverse mortgage generally grows over time. Interest is charged on the outstanding balance and added to the amount you owe each month. That means your total loan balance increases over time as loan funds are advanced to you and interest accrues on the loan.
- Reverse mortgages may have fixed or variable rates. Most have variable rates that are tied to a financial index and will likely change according to market conditions.
- Reverse mortgages can use up all or some of the equity in your home, leaving fewer assets for you and your heirs. A "nonrecourse" clause, found in most reverse mortgages, prevents either you or your estate from owing more than the value of your home when the loan is repaid.
- Because you retain title to your home, you remain responsible for property taxes, the insurance policy on your home, utilities, fuel, maintenance, and other expenses. So, for example, if you don't pay property taxes or maintain homeowner's insurance, you risk the loan becoming due and payable.
- Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.
- Any mortgage, including a reverse mortgage, will feature a lien. A lien against your home gives the loan-issuer the right to possession of your residence until you pay off the mortgage in cases of default.
- Regardless of financial circumstance, you will need to undergo a loan counseling session, where it will be verified that you understand what a reverse mortgage loan is and what the terms and conditions of your reverse mortgage loan are.
- Recent years have seen an increase in the incidence of reverse mortgage scams. If ever you believe you have become the victim of such a scam, it is important to report this to the Consumer Financial Protection Bureau.
It is best to consult a reverse mortgage counselor who can advise you on current interest rates and eligibility. If you are considering a reverse mortgage loan, reach out to such a counselor today.
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