1How a Reverse Mortgage Works

Reverse mortgages permit homeowners to borrow from the equity they have accumulated on their home. Rather than make payments to lenders, it is the lenders who make payments to the borrowers. These payments are issued in any of four forms:

• As lump sums

• As monthly payments (as long as the borrower lives in the home)

• Periodically through a line of credit

• As a combination of any of these methods

2Qualification Requirements for Reverse Mortgages

To be eligible for a reverse mortgage you have to be above the age of 62 and be a homeowner, and there has to be a sufficient amount of equity in the home. In as far as this type of loan is concerned:

• You will be required to complete maintenance or repair work
• Your credit history is not a consideration

A reverse mortgage makes it possible for owners of paid-off homes to borrow against their equity and convert it to cash or a stream of income, and do away with their house payments.

3The Cost of Reverse Mortgages

Just like with conventional loans, reverse mortgage borrowers have to pay some fees in order to get the money. It is possible for these fees to be rolled up into the loan and be financed. These fees also vary because there aren’t any set “standard charges” to comply with. Variations are dependent on who the lender is, third-party vendors, and what type of loan has been selected.

As a borrower you basically pay for:

• Mortgage insurance premiums – this insurance will pay for losses incurred by the lender in the event that your house is worth less than the sum owed at the end of your loan
• Monthly lender fees – lenders normally charge borrowers a certain amount to disburse monthly payments to them
• Loan points or application fees – this fee is a percentage to the lender
• Normal closing costs – these are fees to close and they include the charges incurred for recording, title policy, closing agent or escrow, etc.

4Program Types

The amount of a loan available for a reverse mortgage is dependent upon three factors:

• The loan program type that has been chosen
• The borrower’s age
• The amount of equity that will remain after existing mortgages have been paid off

There are two available types of programs to consider. A small proportion of lenders offer fixed-rate mortgages but the majority of them offer these programs via an adjustable rate mortgage loan. The interest for the latter type of mortgage can be adjusted monthly or annually.

A margin is charged by the lenders and it varies from one lender to the next. When this margin is added to the index rate the sum obtained will be equal to the interest rate. In ordinary situations these interest rates are capped. This means that the rate can be increased to a certain amount but not beyond it. The said caps range from 5% to 6% for a rate that is adjusted annually and from 10% to 11% for a rate that is adjusted monthly.

5Planning and Tax Rules

Upfront costs are part of the borrowing cost even though you won’t pay them out of pocket.

These costs do add to the loan’s interest rate so it is prudent for you to closely consider whatever amount you are being charged so you can make a decision as to whether this amount makes sense related to the amount you are likely to borrow.

The HECM Standard (Home Equity Conversion Mortgage) reverse mortgage program is from the Department of Housing and Urban Development and it levies a one-time initial insurance premium set at 2% of your home’s value. The HECM Saver was introduced later by the HUD and it decreases the initial insurance premium from the said 2% to 0.01%.

6How To Find a Reverse Mortgage

Reverse mortgage products are available from a host of mortgage brokers and from various noteworthy lending institutions. You can obtain a published list of approved reverse mortgage lenders, classified by state, by visiting The National Reserve Lenders Association. You can also visit the Department of Housing and Urban Development to access a list of approved HUD lenders. While doing so, remember to check the box that will limit your search to lenders who’ve cleared a HECM loan within the last 12 months.

You should have a complete understanding of how a reverse mortgage work and what their pros and cons are. Because of this, HUD demands that prospective borrowers receive compulsory counseling before applying for these loans. You can obtain a booklet that explains the working of a reverse mortgage.  Making a comparison of various lenders before settling on one of them is advised.

As long as one takes into account the potential risks that come with it, a reverse mortgage plan is an interesting approach to ensuring that life in retirement can be enjoyable and stress-free. It is certainly worth finding out more about this financial solution.

What Do You Think?

Do you know someone who is considering a reverse mortgage?

Would you like to learn more about this?