Also known as a home equity conversion mortgage (HECM), a reverse mortgage is a home loan program for homeowners 62 years of age or older. The loan allows the homeowner to tap into their home equity. Unlike other home loans, a reverse mortgage does not require monthly payments toward the mortgage itself. Although, the borrower is still responsible for making tax and insurance payments on the property.
It’s relatively easy to qualify for an HECM loan when compared to other loan products.
The main eligibility requirements are:
- The borrower is at least 62 years old
- The property is being used as the borrower’s primary place of residence
- The property is a single family home, multi family home (4 family maximum), or a condominium/ manufactured home that has been approved.
- The property’s initial mortgage is paid off
Tip: Funds from the reverse mortgage can be used to pay off the existing mortgage at the time of closing.
Borrowers will also be subject to financial assessment to assure the borrower can make payments on:
- Homeowners insurance
- Property taxes
- General home upkeep
- HOA fees if applicable
The total amount a borrower can receive from a reverse mortgage is based on age, value of the home, and lender rates. Typically, the older you are and the higher the value of your home, then the more money you will see.
HECM loans offer four general options for withdrawing money:
- Taking out a lump sum
- Tenure annuity (receiving a monthly payment as long as the borrower lives in the house.
- Term annuity (receiving a monthly payment for a set period of time)
- Taking out a credit line that grows over time
Don’t make the mistake of thinking this loan doesn’t have to be repaid. Like other loans, reverse mortgage need to be paid back to the lender. A reverse mortgage loan is due when the borrower decides to sell the house, or passes away. When the time comes to repay the loan, the borrower’s heirs decide to pay off the loan and keep the home, or sell the home to pay off the loan. If the house sells for more than the cost of the loan, then the heirs get to keep the remaining balance. If the home sells for less than the loan amount, the lender takes the remaining difference as a loss.