A reverse mortgage is a loan made against a home that you already own. Many people use this type of loan to purchase a second property. It is commonly also understood as a home equity loan. In fact, the Home Equity Conversion Mortgage (HECM) program is a type of reverse mortgage. This loan program may sound tricky, but it can actually be quite simple to understand. Ransom Kelly at Assurance Financial is here to help demystify reverse mortgages in this week’s blog post.
How do Reverse Mortgages Work?
It is simple to understand how a reverse mortgage works. When you get a home loan, you are paying a lender monthly. In a reverse mortgage, the lender is instead making you the monthly payments. Sounds like a dream! Well, it is not as if the lender is paying you back free. You see, they are taking the equity in your home, for which you have already paid, and paying it back to you. Think of it as an advance towards the equity of your home. You may need to sell the home to pay the reverse mortgage back. Your estate or your spouse can also pay it off. There are several types of programs.
Home Equity Conversion Mortgages
Home Equity Conversion Mortgages (HECMs) are great because they are government-backed. However, some claim they come with high costs. The amount you can get with a HECM depends on numerous factors. One primary factor is your age. The older you are, the longer you have typically have to build equity in a home. Therefore, you may get more money from an HECM if you are a senior. In order to apply for an HECM, you must undergo a financial assessment from a government-approved housing counselor. This counselor will review your income and home value, and determine your ability to handle additional financial responsibility. They will also suggest other options, as needed.
Single-purpose Reverse Mortgages
One recommendation that the counselor may make is to get a single-purpose reverse mortgage instead of an HECM. This may be because the single-purpose program has less up-front costs. The program takes different forms within various nonprofit or government agencies. The funder and financial partner of the program designates a single-purpose for this type of mortgage—hence the name. For example, they may say the loan can only be used for home repairs, tax payments, or renovations.
Proprietary Reverse Mortgages
This is a type of reverse mortgage designed by a private lender. Sometimes these lenders are willing to make larger loans if the person and their home qualify. You may wish to consider this type of reverse mortgage for high home value.
Ransom Kelly at Assurance Financial is standing by to help answer additional questions about reverse mortgages. Contact our Birmingham, Alabama office today for more information.