What Is A Reverse Mortgage?
A reverse mortgage put simply, is a mortgage loan, just like the current mortgage you may have or have had in the past. With your conventional loan you may have now, it is a lien against your property, correct? A Reverse Mortgage is just like a Refinance. We pay off your current conventional loan and replace it with another type of loan, one for which you do not have to make payments. The Reverse Mortgage pays you! Instead of making monthly mortgage payments, homeowners 62 or older who have built enough equity in their homes can cancel out mortgage payments and possibly receive additional income, while ensuring they can remain in their home and retain ownership. Reverse mortgages, also known as HECM Loans for Seniors, are a HUD-approved and FHA insured, safe way for seniors to tap into their homes’ equity to access additional income during retirement to pay bills, travel and to generally enjoy a higher quality of life. As non-recourse loans, reverse mortgages don’t need to be repaid until the last borrower dies or moves out of their home. The repayment amount will never be higher than the home’s value.
How Does a Reverse Mortgage Work?
Reverse mortgages tap into the equity homeowners have already built in their homes by unlocking this equity as income. Different types of loans and mortgage rates determine how the homeowner receives income from the reverse mortgage. Homeowners might receive one lump sum payment, access to a credit line, monthly payments or simply relief from making monthly mortgage payments. Unlike standard home equity loans or second mortgages, reverse mortgage borrowers don’t have to repay the loan until they no longer live in the home. The income from a reverse mortgage is tax-free, and homeowners are free to spend it however they choose.
To qualify for a reverse mortgage, homeowners don’t have to carry a zero balance on their current mortgages. Mortgage balances simply need to be low enough to be paid off with the proceeds of the reverse mortgage. This can be calculated by dividing the remaining balance on your loan by the home’s value; this is your Loan to Value ratio (LTV). Qualifying borrowers may have LTV as high as 41.7% to 75%, depending on the age of the youngest borrower.
Types of Reverse Mortgages
Most reverse mortgages fall under the Federal Housing Administration’s (FHA) Home Equity Conversion Mortgage program or HECM. This HUD-approved and FHA insured loan program is non-recourse, which means that when repayment is due, the balance will never be higher than the value of the property, even if the property’s value has gone down. Any equity that remains can be given to heirs. If the heirs would like to purchase the property, they would be able to purchase it for 95% of the Fair Market Value.
HECM for Purchase
A HECM for purchase is a HUD-approved, FHA-insured reverse mortgage which allows homeowners to purchase a new home using the loan proceeds from their old home. You provide the down payment and the reverse mortgage covers the rest. Best of all, no further mortgage payments are required. Reverse mortgages for purchase are exactly the same as regular reverse mortgages, in that they are non-recourse loans which allow the borrowers to remain in their home. The only difference is that the borrower may use the loan to upgrade, downsize or relocate to a new residence. It’s a great alternative to paying cash for a house because it allows you to keep more of your money. Learn more about HECM for purchase loans here.
Jumbo Reverse Mortgages
Jumbo Reverse Mortgages are a proprietary product. Jumbo reverse mortgages are a fixed-rate alternative to the FHA insured reverse mortgage programs. These often offer higher loan amounts, for homeowners whose home is valued at $1,200,000 or higher. In the case when a property does not qualify for a traditional federal HECM loan, we at Trinity Reverse Mortgage can often have the property qualified for the Proprietary Jumbo if the value is at or above $500,000. This works really well with FHA Non-Qualified Condos because the Jumbo product will loan to a condo owner regardless of whether the condo association is FHA approved or not. When home values range $500,000 to $1,200,000, our first choice would be to consider the HUD/FHA loan options first, before exploring Proprietary Jumbo Reverse Mortgage as an alternative. One of the big advantages of Jumbos is they do not require Condo’s to be HUD approved. The second advantage is increased proceeds for the larger value properties ranging usually from $1,200,000 to well over $6,000,000!