A reverse mortgage is a loan designed for seniors who own their homes. Homeowners over the age of 62 who have considerable home equity can borrow against their home’s value and receive the funds as a lump sum, fixed monthly payment, or line of credit. Unlike a mortgage that is used to purchase a home, there are no monthly loan payments made on a reverse mortgage. In the event the borrower dies, permanently moves from the primary residence, or sells the primary residence the entire loan balance is due.
Lenders are federally required to structure reverse mortgages so that the loan proceeds don’t exceed the home value and ensure the borrower or borrower’s estate isn’t liable for paying the difference of the loan balance in the event it exceeds the home value.
How does a reverse mortgage work?
With a reverse mortgage, the reverse mortgage borrower receives payments from the reverse mortgage lender. The homeowner chooses a payment option and pays interest on the proceeds which are rolled into the loan balance. The homeowner’s debt increases over the life of the reverse mortgage loan while their home equity decreases.
The home is considered collateral for a reverse mortgage the same as a traditional mortgage. The proceeds from selling the home go to the reverse mortgage lender to repay the loan’s principal, interest, mortgage insurance, and fees up to what the homeowner borrowed. The IRS considers the funds from a reverse mortgage a loan advance, therefore the proceeds aren’t taxable.
Sometimes seniors take out reverse mortgages without their spouse or family members knowing to provide sufficient funds to cover their living expenses in retirement. Unfortunately, a reverse mortgage loan is immediately due in the event the homeowner dies. For heirs or estate managers, paying off the reverse mortgage loan in a short time’s notice without having to sell the property is difficult. Families don’t often have the means to pay off any outstanding balance in a short time frame and need to find a customized solution for their situation.
HCS EQUITY is one of the best reverse mortgage companies in California providing specialized financing to trustees, beneficiaries, administrators, trust and estate attorneys, fiduciaries, guardians, and conservators. Their expert brokers specialize in loan products for trusts and estates that have liquidity shortages and need emergency funds to stop foreclosure, pay property taxes, cover medical expenses, or any other purpose.
Types of Reverse Mortgages
Homeowners who meet the eligibility requirement for a reverse mortgage can choose from one of three types of reverse mortgage options:
- Single-purpose reverse mortgages: this is the least expensive reverse mortgage option offered by a non-profit organization or a state or local governing agency. The reverse mortgage lender specifies the purpose of the loan, such as paying for home repairs, improvement, or property taxes. Low to moderate-income homeowners usually qualify for single-purpose reverse mortgages.
- Proprietary reverse mortgages: these are private loans backed by the companies who develop them. Homeowners with a higher-valued home can get a larger loan advance from a proprietary reverse mortgage.
- Home Equity Conversion Mortgages (HECMs): HECM loans are federally-insured reverse mortgages backed by the US Department of Housing and Urban Development (HUD) that can be used for any purpose the homeowner sees fit.
When choosing between HECMs and proprietary reverse mortgages and the amount to be borrowed, it’s a good idea for homeowners to keep the following factors in mind:
- Upfront costs
- Type of reverse mortgage
- The appraised home value
- Current interest rates
- A financial assessment of property taxes and homeowner’s insurance
There are six different payment options homeowners can choose from once a reverse mortgage has been selected:
- Lump-sum: the loan proceeds are distributed at once under a fixed interest rate.
- Equal monthly payments (annuity): so long as one borrower resides in the home as a primary residence, the lender will make equal monthly payments to the borrower.
- Term payments: the lender pays the borrower equal monthly payments for a fixed term.
- Line of credit: the homeowner can borrow funds as needed and only makes interest payments on amounts borrowed from the line of credit.
- Equal monthly payments plus a line of credit: the borrower receives equal monthly payments from the lender and has access to a line of credit.
- Term payments plus a line of credit: the borrower receives equal monthly payments from the lender for a set period of time and has access to a line of credit.
It’s important for homeowners to compare financial products and understand their payment options to make an informed decision before committing to a reverse mortgage product.