What is a Reverse Mortgage?
A reverse mortgage is a type of loan that allows homeowners aged 62 and above to convert a portion of their home's equity into loan proceeds. Unlike traditional mortgages where the homeowner makes payments to the lender, a reverse mortgage works in the opposite way - the lender makes payments to the homeowner.
A reverse mortgage is a type of loan that allows homeowners aged 62 and above to convert a portion of their home's equity into loan proceeds. Unlike traditional mortgages where the homeowner makes payments to the lender, a reverse mortgage works in the opposite way - the lender makes payments to the homeowner.
Eligibility
To qualify for a reverse mortgage, homeowners must:
Be at least 62 years old
Live in the home as their primary residence
Have sufficient equity in the home
Be able to continue paying for property taxes, homeowner's insurance, and home maintenance
How Does a Reverse Mortgage Work?
Once a homeowner is approved for a reverse mortgage, they can choose how they wish to receive the loan proceeds. The options typically include:
Lump sum: Receive all the money at once.
Monthly payments: Receive monthly payments for a specific number of years, or for as long as you live in your home.
Line of credit: Draw upon the loan proceeds at any time until the line of credit is exhausted.
Combination: A mix of monthly payments and a line of credit.
It's important to note that while the homeowner does not need to make monthly repayments on a reverse mortgage, they must keep up with property taxes, homeowner's insurance, and home maintenance costs. Failure to do so can lead to the loan becoming due and payable.
The loan becomes due when the last surviving borrower sells the house, moves out of the home permanently, or passes away. At that time, the homeowner or their heirs can either repay the loan and keep the home or sell the home to repay the loan. If the home is sold, any remaining equity after the loan is paid off goes to the homeowner or their heirs.
Reverse Mortgage vs Traditional Mortgage
In a traditional mortgage, the homeowner borrows money to buy a house and then makes monthly payments to the lender to repay the loan. Over time, the homeowner builds up equity in the home as the loan balance decreases and the home's value (hopefully) increases.
A reverse mortgage, on the other hand, is designed to give homeowners access to their home's equity without having to sell the house. Instead of making payments to the lender, the lender makes payments to the homeowner, reducing the homeowner's equity over time.
In both cases, the homeowner holds the title to the home. The key difference lies in the payment structure and the use of home equity.
Additional Facts and Stats
HECM borrowers withdrew an average of 73.26% of their available principal limit on their initial draw in 2021, up from about 67.7% in 2020 and 63.1% in 2019. This trend suggests that many homeowners are taking advantage of the significant liquidity provided by reverse mortgages to meet their financial needs
In 2021, approximately 90% of borrowers with HECMs opted for the line-of-credit payment option. This option provides flexibility and control over finances, as the homeowner can choose when and how much to withdraw from the loan proceeds
The Federal Housing Administration (FHA) gave a mortgage insurance endorsement to 49,163 Home Equity Conversion Mortgages (HECMs), a type of reverse mortgage, in the fiscal year 2021, up from 41,825 in 2020 and 31,272 in 2019. This indicates a rising trend in the popularity and acceptance of reverse mortgages as a financial tool.
Reverse mortgages are proving to be more popular among women than men, with 36% of federally insured reverse mortgages serving single female borrowers and 21% serving single male borrowers. Additionally, 41% served multiple borrowers, showing the diversity of households that can benefit from reverse mortgages