Life is long and full of pleasure! But sometimes, we need to think about oldness. A wonderful time (contrary to stereotypes) when you can enjoy life and fulfill your dreams. There is reverse mortgage funding for people to secure a carefree retirement.
What is reverse mortgage funding?
A reverse mortgage (Reverse Mortgage, Home Equity Conversion Mortgage, HECM) is a non-performing loan secured by real estate. It is a mechanism to support retirees by monetizing their homes. The Federal Housing Administration (FHA) provides mortgage insurance in the United States. An FHA-approved bank issues the loan.
Reverse mortgages allow seniors to obtain a lifetime loan against their property while retaining ownership. At the same time, you do not need to pay monthly interest on the loan: they are accrued and added to the debt. After the borrower’s death, the bank sells the housing, returns the funds along with interest, and transfers the remaining amount to the heirs. Reverse mortgages are canceled if the property is vacant for over 12 months. The borrower’s heirs can repay the loan: if they pay the entire debt, they will become the property owners.
To determine if a retiree is eligible for a reverse mortgage, they should contact a HECM consultant. You can find a specialist on the Department of Housing and Urban Development (HUD) website.
Who is reverse mortgage funding suitable for?
- age not less than 62 years
- no tax and insurance debts, good credit history
- real estate is used as the primary place of residence
- the borrower must live in the house or apartment for at least six months a year
- the presence of direct ownership (if somebody bought the property on credit, they could repay the debt with reverse mortgages)
Reverse mortgage funding types
Depending on the frequency of payments and the contract terms, several types of reverse mortgages exist.
Fixed-term reverse mortgage
Typically, the borrower receives fixed monthly payments over a specified period and repays the loan at the end of this period. The loan must be repaid earlier in the event of the borrower’s death or the sale of the property.
Reverse mortgage for life
The borrower is not obliged (although he can) to repay the loan during his lifetime. Lifetime reverse mortgages may be offered with a fixed periodic annuity-like payment for life (for example, a lifetime payment of $200 per month) or with a fixed number of regular payments over a specified period (for example, monthly payments of $500 per month for the next 120 months).
Reverse mortgages can also be offered in the form of a line of credit for a certain amount, depending on the property’s value and the borrower’s age. The credit line can be used as often as the borrower chooses. Since the borrower’s aging brings the repayment time of the loan closing, the size of the credit line can increase with the borrower’s age.
Combined reverse mortgages
Combined reverse mortgages are also possible, consisting of a line of credit and the mentioned types of periodic payments.
The following types of real estate can be given as collateral:
- a house for 2-4 apartments, the borrower occupies one of which
- condominium approved by HUD
- a prefabricated house that meets the requirements of the Federal Housing Administration
The loan amount depends on the following:
- borrower’s age
- current interest rate
- whichever is less, the appraised value, market value, or the $625,000 credit threshold
- initial mortgage insurance premium
Next, the pensioner must apply to the bank for a reverse mortgage. A list of FHA-approved lenders can also be found on the HUD website.
Reverse mortgage costs:
- initial mortgage premium: 0.1% (with HECM Saver) or 2% (HECM Standard) of the appraised value, market value, or $625,000 limit
- intermediary fees: valuation, due diligence, insurance, registration fees, mortgage fees, credit checks
- bank loan arrangement fee (Origination Fee): up to $2,500 if the house costs less than $125,000
- the maximum commission is $6,000
- service Fee — $30-$35 per month
How to spend reverse mortgage funding?
Loan funds can be used for daily expenses, medical services, repairs, and travel. In fact, for anything that a person needs. A pensioner can receive a loan both at a time and in installments (for example, monthly).
Funds received from reverse mortgages are not considered taxable income and do not affect participation in state social and health insurance programs. If the money remains in the bank account at the end of the month it was received, and the total amount exceeds the state allowance, the pensioner loses the right to participate in such programs.
Some interesting points about reverse mortgage funding
A reverse mortgage is a type of mortgage secured by real estate with two distinctive features.
- Firstly, a loan can be issued indefinitely and repaid only after the borrower’s death through the sale of collateral real estate or other funds of the heirs.
- Secondly, the borrower must only pay the loan after the repayment period.
This lending is convenient for elderly homeowners who wish to use funds from real estate as a source of income during their lifetime. But they do not want to sell or bequeath housing.
It is important to note that depending on the borrower’s life expectancy, the refinancing interest rate, and the dynamics of real estate prices, the principal amount of the loan may, at some point, exceed the property’s sale value. In the vast majority of cases, the reverse mortgage lender is non-recourse or provides the borrower with a guarantee that the amount owed will not exceed the property’s value.
This means that when the property’s sale price is not enough to repay the loan, the lender incurs a loss. The risk of such losses adversely affects the initial size of the loans offered. It also makes insurance and securitization of reverse mortgages profitable.
Thus, reverse mortgage loans repaid relatively quickly are profitable, while loans not compensated for a long time, as a rule, become unprofitable.
As you can see, there are many options for financing reverse mortgages. This is a safe practice and a proven way to spend a peaceful old age in abundance — to afford decent medicine, entertainment, or travel. If you have any questions about funding — sign up for a consultation. We will select the best options for your financial situation.