How Reverse Mortgage Works and the Various Types

reverse mortgage

 

 

A reverse mortgage is a type of mortgage loan that provides a loan arrangement for home-owning retirees—mostly elderly folks above 61years of age— who want to use their home equity (i.e., the current market value of their home’s interest). It affords such aged homeowners the option of generating income through their home equity without selling out the house.

Reverse mortgage serves elderly homeowners above the age of 61 who want extra income to take care of their rising needs.

 

How Reverse Mortgage Works

In a reverse mortgage, a lender pays the homeowner based on the amount of equity they(the homeowner) have on the home instead of the regular mortgage loans where the client pays the lender every month to buy a home. The homeowner reserves the title to the house, and instead of making monthly mortgage payments, they get an advance on the part of their home equity that is not taxable.  

 

Types Of Reverse Mortgage

There are three types of reverse mortgages: single purpose, federally insured, and proprietary reverse mortgage loans.

 

Single Purpose RM

A single-purpose reverse mortgage allows borrowers (homeowners) to access loans paid from their home equity to cater to expenses specifically approved by the lender. Single-purpose type loans are usually made towards home repairs or other related expenses. Compared to the others, single-purpose loans are the least expensive. This is why they are generally also backed by states and local governments.

 

Federally Insured RM

Also known as Home Equity Conversion Mortgage, this type of reverse mortgage is usually sizeable and can be used to finance any expenses without the lender’s stipulation. As the name implies, Federally insured reverse mortgages are backed by the federal government through the Department of Housing and Development, USA (HUD).

 

Proprietary RM

A proprietary reverse mortgage is a private-companies-backed mortgage available to homeowners whose homes are valued highly in the market. Compared to the other two, it is the most expensive; when the homeowner can access loans, the higher their home is valued. Also, borrowers are free to use the loan for whatever they want without any specifications from the mortgage company. This is why it is also called a jumbo reverse mortgage.

 

The Pros and Cons 

If you are 60 years or older, then you’ve probably started thinking about taking a reverse mortgage on your home. Below are some reasons why it is a good idea.

 

Income supplement

Advancement in age comes with a reduced income as you can no longer work as hard or for as long as you used to. Getting a reverse mortgage will allow you to keep financing your needs with little or no work at all.

 

Your home remains yours

With a reverse mortgage, your home remains yours for as long as you are alive. All you need is to maintain and prevent it from falling into disrepair, pay your taxes and abide by the lenders’ stipulations in the case of a single-purpose or federally insured mortgage.

 

Variety of options

Reverse Mortgages are so flexible that you can select from various options and tailor-make the details to suit your specific needs. Whether you own a small or large home, whether your home is highly valued or not, all borrowers have an option.

 

Cons of a reverse mortgage

A reverse mortgage is not for everyone. The following are some of the cons of taking a reverse loan.

 

Costs

While reverse mortgages look like they are cost-free, there are several payments borrowers are obligated to pay. A good example is a closing cost which can add to the loan, thereby increasing your debt burden.

 

Limited options

It may be true that there are a variety of options to choose from; however, specific mortgage loans limit the possibilities of borrowers, thereby imposing flexibility that many may find undesirable. For example, a single-purpose mortgage prevents borrowers from using loans for reasons other than stipulated, while federally insured mortgages limit the amount homeowners can borrow.

 

Flexible regulation

The regulations guiding reverse mortgages are pretty flexible, especially when it comes to company-backed mortgages. This allows them to charge higher for existing fees, add unnecessary costs, or offer relatively lower loans compared to the market value of borrowers’ homes.

 

Most homeowners do not regret taking a reverse mortgage. However, after considering the options and weighing the pros against the con, you can then decide if a reverse mortgage is for you or not.