A reverse mortgage is a loan that is backed by either a portion or all of the equity from a home. Unlike a second mortgage or equity loan which also base value on a home’s equity, this type of loan only needs to be repaid upon the sale of the home or if it ceases to be the primary residence. These loans are made available only to seniors who have gained equity in their homes and no longer have mortgage payments.
A homeowner seeking to participate in this type of loan must be at least 62 years of age. The primary home from which the loan will be based must normally be completely owned, they must no longer owe money to a mortgage lender. In some cases a reverse mortgage may be used to pay off a small remainder of the home’s mortgage leaving the remaining proceeds to be distributed to the owner. The home itself must be a single or 2-4 family style house. In some cases other types of home may also qualify.
At the time that the home is either sold or no longer used as the primary residence the loan must be repaid. Unlike a second mortgage or home equity loan, there are no regular payments for repayment or interest until the sale or status as primary residence changes. The home owner may spend up to 364 days in a hospital or adult living without affecting this mortgage. At the time of repayment, the homeowner or their heirs retain ownership of the property and receive any equity that remains after repayment of the loan.
There are three types of reverse mortgages which are single purpose, federal insured and proprietary reverse mortgages. A single purpose reverse mortgage is offered in some areas by local governments or not for profit organizations. They are granted for one specific purpose such as home repair or improvement. These loans are generally the least expensive form of reverse mortgage loan.
A federally insured reverse mortgage is more expensive, but also is more widely available. These loans are backed by the U.S. Department of Housing and Urban Development (HUD). In order to qualify for this type of reverse mortgage a homeowner has the additional requirement to meet with a mortgage counselor, however income and medical requirements are waived.
Proprietary reverse mortgages are backed by private companies but have seen a decline in use since the housing market crash of 2008 because of the increasing competitiveness of HUD backed loans.
A reverse mortgage payment may be set up in several ways to fit the needs of the home owner. Payments may be received in equal amounts by monthly installments until the sale of the home or change of primary residence. The loan payments may also be set at a fixed amount sent each month for a finite number of years. Other options allow for payments to be received in amounts and at times decided later in the life of the loan until zero equity remains in the home. These three primary methods of payment may also be used in combinations with on another as long as equity still exists and the home and the owner remains living in the home as their primary residence.
By using the equity in a home, a senior adult may receive a reverse mortgage to help pay for increasing medical or prescription costs or make updates and improvements to their existing home. These types of loans are typically more expensive at closing than a traditional loan but they allow the homeowner the flexibility of postponing repayment and interest payments until a time when they must sell the home.