Reverse Mortgage: What Is It and How Does It Work?

More and more Americans are entering their golden years, but many aren’t prepared for retirement. And with the ever-increasing costs of living, a lot of older adults struggle financially.

One of the ways seniors can raise funds to support their retirement is to get a reverse mortgage or a Home Equity Conversion Mortgage (HECM). A reverse mortgage is specifically designed for homeowners aged 62 and above. This FHA-insured home loan lets you borrow against the equity of your home. You can use the proceeds to pay your medical bills, debts, taxes, and living expenses.

How Does It Work?

You may not be able to borrow the full value of your home equity, even if you’ve paid it off entirely. There’s a principal limit or a maximum amount of money you can borrow. This figure is calculated based on your age at the time of application, your home’s appraised value, the loan’s interest rate, and the HECM FHA mortgage limit.

For 2020, the HECM FHA mortgage limit is $765,600. This means the money you borrow can’t exceed this amount.

As a general estimation, the older you are, the higher your home equity, since you’ve had more time to pay off your property. You’ll likely receive a higher principal limit.

The money get from the HEMC will be used to pay off the remainder of your existing home loan. Then, you’re free to do what you want with the remaining amount. But if you’ve already paid off your original loan, you’ll receive all the money from the reverse mortgage.

Reverse mortgages don’t have monthly payments. You won’t have to pay off the loan until you pass away, move out, or fail to maintain the home. Many borrowers sell the property then use the proceeds of the sale to repay the reverse mortgage in full. If you aren’t able to repay the balance, your spouse, family, or estate will take over the responsibility of the loan.

What Are the Requirements?

saving money

Below are the eligibility requirements to qualify for an HEMC:

  • You must be at least 62 years old. Those younger than 62 can still borrow if their spouse meets the age requirement
  • You must have at least 50 percent home equity, but some lenders have higher requirements
  • You must meet with a loan counselor from a government-approved housing counseling agency
  • The house you’re taking out equity from must be your primary residence
  • You must maintain your property in good condition
  • Your home must be a single-family property, a multi-unit with up to four units, a townhouse, or an HUD-approved condominium.

Although reverse mortgages have no credit score requirements, the lender will evaluate your credit history to assess your financial situation. You also need to provide proof that you’re financially capable of paying ongoing house costs.

Before you apply for an HEMC, weigh the pros and cons first to make sure you’re making the best decision for your financial future. Shop around for the best lender with the most favorable terms and lowest costs. Get a few quotes and compare offers based on closing costs, interest rates, and service fees.

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