Homeowners aged 62 and older: Did you know you can start taking advantage of the equity from your home and never have to make a mortgage payment again? It’s true, and it can be accomplished with reverse mortgages.
Reverse mortgages have become popular in today’s market as more homeowners learn about the benefits, but there are still several misunderstandings surrounding this product.
What's in this article?
In this article, we’ll explain how reverse mortgages work, how to build wealth with a reverse mortgage and what you need to do to qualify.
How does a reverse mortgage work?
With a typical forward mortgage, borrowers take out a loan and repay it monthly. While they are repaying it, they are building up equity in their home.
Reverse mortgages are the opposite: They withdraw equity from your home and eliminate monthly mortgage payments.
Reverse mortgages only require borrowers to pay property taxes, homeowners insurance and general maintenance costs over the life of the loan.
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How a reverse mortgage allows you to build wealth
It might seem too good to be true that you could get a loan that eliminates the need to make monthly repayments.
However, this is a benefit offered only to those aged 62 and older, and it can offer significant support to those looking to save or maintain their retirement funds.
Let’s take a look at the ways a reverse mortgage allows you to build wealth.
1. Additional source of income
Baby boomers are sitting on trillions of dollars of home equity. They’ve dutifully made mortgage payments each month and can now access the benefits.
Reverse mortgages allow borrowers to tap into the equity they have built up in their homes.
Those who qualify can choose to receive the cash as either a lump sum, monthly installments or a line of credit, and the cash can be used as an alternative source of income in addition to your retirement savings.
Borrowers must have a significant amount of equity to qualify; and the amount of cash you can receive largely depends on your age, current interest rates and the value of your home.
2. Eliminate your debts
Reverse mortgages can help senior homeowners eliminate monthly debts, including mortgage payments or other debts such as credit cards, auto loans or student loans.
Homeowners are not responsible for repaying a reverse mortgage until one of the following occurs:
- They move out or sell the home
- They pass away
- They stop maintaining the home or paying taxes and insurance
Homeowners can rest assured that with HECM’s protection, their heirs will not be responsible for any shortfalls when they are deceased.
3. Downsize your home
Another popular use of a reverse mortgage is to downsize a home.
Homeowners can use the proceeds from their current home sale to make the down payment on a new home, and the rest is covered by the reverse mortgage for purchase.
With a reverse mortgage, they’re only responsible for paying taxes, insurance and maintenance costs.
With a traditional forward mortgage, homeowners would be responsible for repaying the entire loan.
What are the qualifications for a reverse mortgage?
As with any type of loan, borrowers must meet certain requirements to qualify for a reverse mortgage.
Requirements may vary slightly by lender, but you can generally expect to see the following:
- Age 62 or older
- Home must be your primary residence
- Property types include single-family, condominiums, townhomes, certain multifamily properties and other HUD-approved properties
- Must have significant equity built up in your home
- Must complete reverse mortgage counseling from a HUD-approved counselor
- Home must meet minimum property standards
- Must pay closing costs, fees, taxes and insurance
- Must meet lender’s credit, income and asset requirements
- If applying for a HECM for purchase, must make a significant down payment — usually 45% or more depending on your age and other factors
It’s essential to work closely with a mortgage lender who is experienced in structuring reverse mortgage loans, such as Compass Mortgage.
Lenders help to ensure that homeowners understand the terms and requirements and supply all necessary documentation.
How do you repay a reverse mortgage?
Homeowners aren’t responsible for repaying a reverse mortgage unless they move out, sell the home, decease or neglect to pay taxes and insurance.
If any of these scenarios occurs, the loan balance will become due.
The most common way to repay a reverse mortgage is with the proceeds of a home sale.
Otherwise, a reverse mortgage can be refinanced into a new loan to resume monthly payments.
Is a reverse mortgage a good idea for you?
The decision to get a reverse mortgage depends on your personal and financial goals.
While a reverse mortgage can be a smart decision for many to supplement retirement income and eliminate monthly debt payments, it isn’t right for everyone.
The best way to determine whether a reverse mortgage is right for you is to consult with your financial advisor, attend HUD counseling and discuss your options fully with a reverse mortgage lender.
Compass Mortgage will help you navigate your loan options
Compass Mortgage treats our borrowers like family.
We will stand by you as your partner and advocate throughout every step of the loan process, and we’ll go above and beyond for you.
The Compass Mortgage team understands decisions in retirement are not to be taken lightly. We will ensure that you fully understand the terms and responsibilities of a reverse mortgage loan so you can confidently make the right decision for you.
Apply now if you’re ready to take the next steps, or give us a call at (877) 677-0609 to speak with one of our experienced loan officers now.
We look forward to helping you navigate this exciting process!