A reverse mortgage is a loan used by homeowners at least 62 years old to buffer their retirement expenses. Borrowers use the equity in their homes as collateral.
Reverse mortgages are designed to make retirement easier for seniors while they continue living in their homes.
Some seniors prefer it because the loan is only due for repayment whenever the borrower vacates the building, such as in the instance of death.
The heirs may repay the loan or sell the property to pay off the loan while the excess proceeds from the sale are remitted to the borrower’s estate.
Types of reverse mortgages
Since the reverse mortgage was invented by Nelson Haynes in 1961, it has evolved.
Haynes, at the time, while working with a Maine-based bank, designed a loan plan to help the widowed wife of his high school football coach without her needing to vacate their home after her husband’s death.
Today, there are three types of reverse mortgages:
Single-Purpose Reverse Mortgages
The loan is only approved for specific purposes, such as the repair of the home. It is usually backed by the state or local government or non-profit; hence the interest charged is generally lesser when compared with other types of reverse mortgages.
Home Equity Conversion Mortgages (HECMs)
The HECMs are backed by the federal government and insured by Proprietary Reverse Mortgages. It is the most common type of reverse mortgage, and there are no loan restrictions.
However, the interest charged is usually higher compared to single-purpose reverse mortgages.
The maximum claim amount for HECMs in 2023 is $1,089,300, an increase compared to the $970.800 approved for 2022.
Proprietary Reverse Mortgages
Private lenders back proprietary reverse mortgages. These lenders are willing to lend homeowners above the HUD maximum claim limit of $1,089,300.
To qualify, your property must be valued higher than the HUD 2023 lending limit.
What is the interest rate on a reverse mortgage?
Two different interest rates are charged on reverse mortgages ― fixed and variable. Fixed interest rates do not change throughout the loan term, and you may be required to take the loan in a lump sum.
If you prefer a monthly payment, a variable interest rate may be charged, which will be influenced by an underlying index and margin rate. When the benchmark rate changes, the interest rate may also follow suit. Therefore, the rate can increase or decrease the benchmark rate.
How to calculate reverse mortgage
Lenders consider different factors when calculating the reverse mortgage a borrower can get. These factors may change depending on the lender you are considering.
A reverse mortgage calculator helps users get a principal limit available in real-time.
Generally, the factors considered by most lenders include the following:
- Age: You must be at least 62 years old. The older you are, the higher the cash you may have access to.
- Home Value: Your home will be appraised based on the current market trend. The value of your home will determine how much the lender will be willing to lend you.
- Interest rates: Interest rates will also affect how much the lender will give you. HECMs and non-HECMs loans have different interest rates. Compare the available options to choose the best.
- Fees and other financial obligations: Existing mortgage balance will lower the amount you will receive. The mortgage will first be paid off from the reverse mortgage loan, after which you will receive the remaining approved funds.
- Payment/distribution type: Whether you choose a lump sum, monthly payment, or a line of credit will influence the amount you get from a reverse mortgage lender.
Reverse mortgage vs. Forward mortgage
A forward mortgage is what is usually referred to as a traditional mortgage.
- A reverse mortgage is accessible for people at least 62, while anybody of legal age can get a forward mortgage.
- You must be a homeowner to apply for a reverse mortgage. Forward mortgage, on the other hand, can be used to purchase a home.
- A reverse mortgage loan is due when the borrower vacates the property, while a traditional mortgage requires monthly payments.
- Since a reverse mortgage is targeted at senior citizens, it is regulated by the federal government to protect them from predatory lenders. Traditional mortgages are not.
Right of rescission
The right of rescission is a borrower’s right to cancel a loan deal within a specific time frame. For most reverse mortgages, this is usually three business days after the closing documents are signed.
How to cancel a reverse mortgage loan
- Notify the lender in writing.
- Keep copies of communication between you and the lender.
- The lender has 20 days to refund all money paid to finance the reverse mortgage loan.
For traditional mortgages, you do not have a right of rescission if the loan will be used to purchase a home.