Reverse Mortgage

You know what a mortgage is, but what about a reverse mortgage? Is a reverse mortgage good to use on your Utah home? Learn about reverse mortgages below to see if they will be a good option for you.

What is a Reverse Mortgage

Let's start off by talking about what a reverse mortgage is and how it works. A reverse mortgage is a type of loan that allows you to trade some of the equity in your home in exchange for cash. Remember that the equity you have in your home is just the amount your home is worth minus the amount you still owe if you have a mortgage. What makes a reverse mortgage different from many other loans is that there are no monthly payments. Instead, the total amount for the loan is due in full when you die or when you sell or move out. It's a lot like a home equity loan, but with one big payment at the end, rather than smaller monthly payments along the way.

The most common use of a reverse mortgage is to supplement your income during retirement. Lots of retired folks own their homes free and clear, but don't otherwise have much in the way of retirement savings. The reverse mortgage allows people like this to access some of that equity in their home while staying put in a home that they've probably owned and lived in for a long time. Depending on what type of reverse mortgage you get, that extra cash can be used for just about anything, from repairs and renovations to cars and vacations. When you get a reverse mortgage, you have three options for how you'll receive the funds. You can choose to receive the entire amount you're approved for upfront in one lump sum payment, or you can elect to receive smaller, equal monthly payments for a certain number of years. Or you can use the reverse mortgage like a line of credit, withdrawing whatever amount you need whenever you need it.

The amount you can take out on a reverse mortgage varies based on a number of factors. Your lender will look at your age, the amount of equity you have in your home, and the amount you currently owe if you have a mortgage. In general, you'll be approved for a larger amount if you're older, you have a ton of equity, and you own the home free and clear. So far, I've made reverse mortgages sound pretty appealing. Cash in your pocket whenever you want, no payments, and you get to keep your home. Are there any negatives? Well, for starters, reverse mortgages aren't free. I know it might seem like free money, but just like any other lender, reverse mortgage lenders exist to make money and they make it in a number of ways. Let's go over three of them. And remember, since you aren't making payments every month, all of these are simply added to your loan balance. 

Start Up Cost

Number one are your startup costs. Just like regular mortgages have closing costs, reverse mortgages have origination fees. Let's pretend that your origination fee was $5,000 and you'll be getting a $2,000 check every month. After your first month, you'll have an extra $2,000 in your bank account, but your reverse mortgage balance will already be $7,000 thanks to that origination fee. 

Account Maintenance Fees

Number two are your monthly account maintenance fees. These might be small, like $40 or $50 per month, but they'll really add up over time.

Interest Fee’s

Number three are your interest fees. Reverse mortgages typically come with higher interest rates than regular mortgages. And because you're not making payments every month, you've got compound interest working against you. Not good. In addition to these three money makers for your lender, you'll also be required to purchase a special mortgage insurance policy to protect your lender from any eventual losses. So you can add that to your balance every month as well.

Property Taxes Insurance and HOA Fee’s

One factor that is often overlooked by reverse mortgage recipients is that you're still responsible for paying your property taxes, homeowner's insurance, and HOA dues. If you're used to paying a traditional mortgage, you might forget about these other expenses, especially the property taxes and homeowner's insurance, because they're normally included in your monthly mortgage payment. With a reverse mortgage though, you'll be responsible for paying those expenses out of pocket. And if you fail to pay, the reverse mortgage lender will foreclose on your home. This is a harsh reality that many Americans with reverse mortgages face every year. Reverse mortgages are typically repaid with the proceeds from the sale of your home, either by you, if you decide to sell, or buy your heirs, if you live in the home until you die.

In either case, a reverse mortgage is a non-recourse loan. This is a good thing. What it means is the maximum amount you or your heirs will need to pay the lender is the fair market value of your home. If the balance on the reverse mortgage happens to be more than the value of the home itself, that difference is covered. Remember that special mortgage insurance policy you paid for earlier if the home sells for more than the reverse mortgage amount, then you or your heirs get to keep the extra profits.

Reverse Mortgage Requirements

Now that you understand the basics of what a reverse mortgage is, let's talk about the requirements to qualify for your Utah home. And there are several requirements. Number one, you've got to be at least 62 years old. If you're younger than that, you're out. Number two, you must be a homeowner. If you don't own a home, you have no home equity access. Number three, the home you wish to use for the reverse mortgage must be your primary residence. You have to live there at least six months out of the year. Vacation homes don't count. And number four, you must have a significant amount of equity in your home. It's ideal if you own your home free and clear. It's less ideal, though still feasible if you have a small mortgage. But if you have less than 50% equity, you can count yourself out. If you qualify based on the factors I just discussed, you'll also need to meet with a reverse mortgage counselor who will help you understand all the details and make the best possible decision.

Three Types of Reverse Mortgages

There are three different types. Each type is a little bit different, but they all serve the same essential purpose that I described earlier. Number one is called a single purpose reverse mortgage. This type of reverse mortgage is typically offered by state and local governments or by non-profit organizations to people with a low income. The amount they'll lend you is generally small, and it can only be used for one purpose. Hence, the name. That purpose is decided upfront as part of the approval process. And it's generally something like property tax payments, home repairs, or homeowners insurance. When you think of a single-purpose reverse mortgage, think essentials. Number two is called a home equity conversion mortgage, or HECM. This is the most common type of reverse mortgage. It's federally insured by the United States Department of Housing and Urban Development, in case your lender would declare bankruptcy and the money you receive can be used for any purpose.

Because the reverse mortgage is federally insured, there are limits on the amount you can borrow, but they're much higher than what you'll get with a single-purpose reverse mortgage. Number three is called a proprietary reverse mortgage, and it's essentially a reverse mortgage that's offered and backed by a private company. With this type, you lose the federally insured aspect, but you stand to gain additional lending power without the federally imposed limits. Proprietary reverse mortgages are a little more difficult to come by, but they're out there for people who want to borrow more. Whatever type you go with, you generally have something called a right of rescission. What this means is that when you sign for a reverse mortgage and decide that maybe it wasn't the best decision, you have three business days to call the deal off.

Reverse the Reverse Mortgage

You can reverse the reverse mortgage. So if you feel like you or a family member made a bad decision or got pressured into a bad deal, it might not be too late to back out unscathed.

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