What’s a Reverse Mortgage?

by | Nov 11, 2016 | Financial Services

Reverse mortgages are very specific kinds of loans for homeowners age 62 and up who either own their houses or can easily pay their primary mortgage off, either who have savings or the assistance of a reverse mortgage.

Reverse mortgages tap–and slowly drain–the equity you have built up within your home. In most instances, it’s possible to use the funds for anything. Payments usually are tax-free.

So long as you still reside in your house, you will not have to repay the loan. But, if you sell your home, die, or move out, it has to be paid back–whether that is by you, your heirs, your estate, or your spouse.

How am I going to get my reverse mortgage payments?

You will have various choices for getting the funds. Generally, you may ask for either a lump sum payment; fixed month-to-month payments for a specific period of time; fixed month-to-month payments as long as you are in the house; or line of credit which allows you to select how much you wish to get and when.

Also, you might choose to obtain one part of the reverse mortgage payments through a line of credit and an additional part through fixed payments, whether that is for a specific period or as long as you are in the house.

What expenses are related to a reverse mortgage?

A reverse mortgage does not come cheap. Most lenders, unfortunately, do not publicize prices for reverse mortgages, yet interest rates typically are greater than what you would pay with conventional mortgages or home-equity loans. Charges easily can tack on thousands of dollars. However, in general, you’ll get a reduced rate with federally-backed home equity conversion mortgages than proprietary reverse mortgages.

How’s my interest rate decided with the reverse mortgage?

These days, many reverse mortgages will have variable interest rates. Typically, your rate is tied to a specific rate index like the one month LIBOR which is going to go down and up with the market. A lender is going to add a margin of around 2 – 3 percentage points on top of this index to decide your rate.

The HECM lender does not hold back a part of your payments in order to cover interest. The interest instead, compounds until pay back, when it has to be paid in conjunction with the principal.