How does a reverse mortgage work?

In the US, reverse mortgages, called Home Equity Conversion Mortgages (HECM), were created in 1988 under the Reagan administration. We will attempt to explain a reverse mortgage.  A reverse mortgage is a way to use the equity in a home, by borrowing against it. With a reverse mortgage the homeowner is still responsible for the upkeep of the property as well as paying homeowners insurance and property taxes.

The homeowner is paid a certain amount of interest every month on the available equity in the home. This is as opposed to a second mortgage or a home equity loan where the homeowner receives a large sum of money but is required to make a monthly payment of principle and interest on that loan.

In order for a HECM to be an acceptable option, the existing mortgage should be low enough to be able to be paid off with the HECM and still give the homeowner extra cash for living expenses. Accordingly, if the existing loan balance is too high to qualify for the HECM the loan can be paid down to the point the homeowner would qualify for the HECM, if possible.

Generally, eligibility is restricted to 62 years of age or older for the homeowner, however in 2014, the law was revised to allow spouses under the age of 62 to continue with the reverse mortgage after the older spouse has passed away, thereby preventing loss of the home, and/or bankruptcy or financial ruin for the surviving spouse.

Can you explain the process?

Before starting the reverse mortgage process, applicants are required to take an approved counseling course. Eligibility requirements including a financial assessment must be met.

If you owe more than 50% of the value of your home, this is probably not a good option. Most of the time, if a company is advertising on television, that company would be a company to stay away from.

Generally speaking, the older the borrower, the more money will be available, whereas the higher the interest rate, the less the available funds will be across all ages.

The borrower must go through a financial assessment, including having a fairly clean credit record, with no late credit card payments in the last 12 months, and the ability to pay taxes, insurance and upkeep with enough money left over for monthly expenses.

As with any government program, on the one hand, it’s a good program for the 62 and older population who are eligible and qualify for it, if the need exists. On the other hand, there are plenty of scams, insufficient training programs, and questionable lenders who will take advantage of at risk individuals, i.e., the elderly, with or without a real need of the homeowner for the program. As of late, a few updates to the program have taken effect to prevent such fraudulent activities, and certainly more is required.

Canada and Australia also have a program for reverse mortgages similar to the US’s.

Have you been asking yourself, “Should I get a reverse mortgage”?

This reverse mortgage information is only a short, down-and-dirty overview of the explanation and process of the HECM program, and is the opinion of the author.  If a person is interested, and feel they have an actual need for the program, please contact a local reputable banking institute to find out if you qualify and if you have enough equity.

More information can also be obtained from the National Reverse Mortgage Lenders Association, or ReverseMortgage.org (not a paid advertisement). ReverseMortgage.org has a calculator online to help determine who should get a reverse mortgage.

If you are interested in making extra money other than a reverse mortgage, see my post on affiliate marketing.

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Aloha

Steve