For homeowners who are 62 years of age or older, taking out a reverse mortgage is a great way to supplement your income. However, you may have many questions that you need answers to before deciding if this is right for you. Here some reverse mortgage faqs.
What is a reverse mortgage?
A reverse mortgage is a loan available to homeowners, 62 years or older, that allows them to convert part of their home equity into cash without having to make monthly mortgage payments.
The point of a reverse mortgage is to help seniors with limited income to cover basic monthly expenses and healthcare. Instead of making monthly payments to the lender, as with a regular mortgage loan, the lender makes payments to the borrower.
As long as the borrower lives in the home, the borrower does not have to pay back the loan. If the borrower no longer lives in the home, the reverse mortgage is paid back in one lump sum.
How do I qualify for a reverse mortgage?
To qualify for a reverse mortgage, you must be at least 62 years old, live in the home as a primary residence and have sufficient home equity. You must also meet the financial eligibility criteria.
If I don’t have to make payments, how do I pay off the reverse mortgage?
The most common method of repayment is by selling the home. The money you receive from the sale is then used to repay the reverse mortgage loan in full. Otherwise, you can pay off the loan balance and keep the home.
What are the costs of a reverse mortgage?
There are various costs associated with taking out a reverse mortgage. This may include interest on the loan, origination fees, third-party charges, and an appraisal.
Appraisal: An appraisal can cost anywhere from $250 – $1,000 depending on the size, age and condition of the home.
Interest rates: Interest rates can fluctuate over time, but it’s usually around 5%. This means you will be charged this amount every year, but you will only need to pay it at the end of your loan term or when you sell the home.
Origination fee: An origination fee is charged by the lender to cover the cost of processing your loan application. Usually, the origination fee is equal to 2% of the first $200,000 of your home’s value and 1% of any amount above that, with a maximum of $6,000.
What are the different types of loan payout options?
When you get a reverse mortgage, you have a handful of options to choose from on how you want the loan amount paid out. You can get monthly payments, or take it all in one lump sum, or you can get a line of credit to draw money when it is needed. You may also be able to include both an upfront sum as well as monthly payments.
Will I have to pay taxes?
No, reverse mortgage payments are not taxable because the payments are considered loan proceeds and not income. However, you will still need to pay the required property taxes.
How much equity do I need to get a reverse mortgage?
Usually, homeowners over the age of 62 will need at least 50% equity to have a good chance of qualifying. This is because a HECM requires you to use the reverse mortgage money to first pay down any remaining balance on your original mortgage.