Summary:
A reverse mortgage allows you to obtain money from your home without having to sell your home or take on a second mortgage. How does a reverse mortgage work? The following article provides information on obtaining a reverse mortgage loan, the types of reverse mortgages available, and the costs and fees associated with this type of loan.

Details or Sample:
If you are an older American living on a fixed income, a reverse mortgage might be a good idea if you need additional retirement income, to pay for medical expenses, or to finance a much needed home improvement. In essence, a reverse mortgage allows people who are “house-rich” yet “cash-poor” to cash in on the equity in their homes without having to sell the home or take on a second mortgage.

How exactly does a reverse mortgage work? In a “normal” mortgage, you make regular monthly payments to a mortgage lender for the principal (and interest) owed on your house. In a reverse mortgage, you actually receive money back from the lender based on the principal that is already in your house. This money does not need to be repaid for as long as you remain in your home and use it as your primary residence. Instead, the loan will be repaid upon your death or sale of your home, or if you no longer use your home as your primary residence.

In order to qualify for a reverse mortgage, you must be at least 62 years of age and reside in the home on which you wish to receive the reverse mortgage. Lending agencies used to place income restrictions on individuals seeking reverse mortgages; generally, individuals with low to moderate incomes were more likely to obtain loans. However, in recent years, as more lending agencies offer and compete for reverse mortgages, that stipulation has become less common.

There are three basic types of reverse mortgages: single-purpose, federal, and proprietary. Single purpose reverse mortgages are offered by state and local government agencies (and some non-profit organizations). The costs of obtaining a single-purpose loan are quite low; however, the loan itself is not available in all states and regions. Single-purpose loans must be used for a “legitimate” purpose (specified by the lender), like payment of property taxes. The loan is also, as its name states, for a single purpose only.

Federally-insured reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs), are backed by the U. S. Department of Housing and Urban Development (HUD). Proprietary reverse mortgages are private loans sponsored by individual corporations. Both of these loan types are more expensive but are also more widely available. They have no income or medical requirements and can be used for any and multiple purposes.

HECMs require that you first meet with a house counselor who is government-approved. This counselor will explain the costs and benefits of the loan as well as other alternatives (such as other government or even nonprofit programs). The total amount of money that you can borrow will be calculated based on your age, the appraised value of your home, your home’s location, and current interest rates. You will also decide how the HECM is paid out to you- whether as a series of fixed cash advances, as a line of credit, or both.

The downside to obtaining an HECM is that, because it is government sponsored and regulated, oftentimes the cost of obtaining one will be the same no matter where you go. All HECM lenders must follow HUD rules, so the payout percentage, fees, and interest rates may be preset to certain values. Therefore, if you live in a higher-valued home or have a good amount of home equity, it may be better to shop around for a proprietary loan.

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