What is a Reverse Mortgage Loan?
A reverse mortgage loan is a home equity loan specifically designed for older homeowners who want to access the equity they've built up in their homes. The loan enables homeowners to access a portion of their home's equity by borrowing against it, rather than selling the property or taking out a traditional home equity loan which requires regular payments. With a reverse mortgage, the homeowner retains 100% ownership and control of their home. Reverse mortgages are not a one-size-fits-all solution to bridging gaps in retirement funding. Different circumstances require different solutions and as reverse mortgage experts, we will guide you through the various reverse mortgage options using data-driven insights gained from our innovative technology to uncover whether a reverse mortgage will help you reach your individual goals.
What is a Reverse Mortgage? Understanding Your Options
When exploring the question, "What is a reverse mortgage?", it's important to understand that there are several different types of reverse mortgage loans, each tailored to meet unique financial needs and circumstances. Reverse mortgages have one common characteristic: no monthly mortgage payments. This feature makes them a creative and lucrative option to meet many goals in retirement. These loans can be used to refinance a primary residence or purchase a new one. Reverse mortgages are loans given to homeowners who are 55 or older based on the equity available in their home or a home they are purchasing. The older the homeowner is, the larger percentage of equity they can access. The loan is paid back when the home is no longer occupied as the client's primary residence. When doing a refinance, the loan can be accessed as cash or a line of credit. Many people find the line of credit especially advantageous as the available balance can grow over time, possibly giving them access to more funds when they are older and expecting their living costs to increase.
Reverse mortgages have been around since the 1980's but have gone through several rounds of changes and upgrades over the years to make them safer and more lucrative for older homeowners. Read more about the history and changes that have happened on our blog here: A History of Reverse Mortgages in America
When searching "What is a reverse mortgage?" you will find that there are proprietary or private reverse mortgages and government-sponsored or FHA reverse mortgages. All reverse mortgages allow the homeowner to retain 100% ownership and control of their home and the amount that will need to be paid back when the loan is due can never exceed the value of the home at maturity date, even if the loan balance has exceeded the value of the home. This is known as a non-recourse loan. Still wondering "What is a reverse mortgage?" read on further:
Home Equity Conversion Mortgage (HECM)
The most common and widely recognized type of reverse mortgage is the Home Equity Conversion Mortgage (HECM). This federally insured program, managed by the Federal Housing Administration (FHA), is specifically designed for homeowners aged 62 and older. With a HECM, seniors can access their home’s equity without the requirement to repay the loan until they sell the home, permanently move out, or pass away. The amount you can borrow depends on your age, home value, and current interest rates. Since HECM reverse mortgages are an FHA loan, they require a mortgage insurance premium as part of the loan. This cost is included in the loan.
Single-Purpose Reverse Mortgage
Another type to consider is the single-purpose reverse mortgage, which is typically provided by state and local government agencies or non-profits. This option is often targeted toward low-income seniors and restricted to specific uses, such as home repairs, maintenance, or property taxes. While these loans may have limitations, they can be an excellent, affordable solution for homeowners who have specific financial needs. They are not widely considered as a "reverse mortgage" as sometimes the balance can be forgiven over time but they don't require monthly mortgage payments so that is why some consider them a reverse mortgage. One example of this type of loan is the Oregon Homeowner Assistance Fund of HAF. You can read more about this program on our website here: Local Resources
Proprietary Reverse Mortgage
Proprietary reverse mortgages are private loans offered by individual financial institutions. Unlike federally insured HECMs, these loans are backed by the private companies that create them. Proprietary reverse mortgages often come with higher lending limits and greater flexibility in loan terms, making them particularly appealing to homeowners with higher-value properties. Since they are not federally insured, there is no mortgage insurance premium with proprietary reverse mortgages. As a broker, we have access to every proprietary reverse mortgage including the Platinum, the Choice and the HomeSafe suite of products. Proprietary reverse mortgages are often referred to as jumbo reverse mortgages because they can be used for homeowners with high-value properties that exceed FHA lending limits. When you see the term "jumbo reverse mortgage" they are referencing proprietary reverse mortgages.
Reverse mortgage loans can be a useful financial tool for older homeowners who want to access the equity they have built up in their homes without having to sell their property or take out a traditional home equity loan. There are many creative ways to use a reverse mortgage to elevate your lifestyle and increase your quality of life in retirement. Studies show the biggest benefit is gained when homeowners open the reverse mortgage as soon as possible and use the funds in tandem with traditional retirement assets as they age. This is called the Coordinated Withdrawal Strategy.
To get a reverse mortgage, you have to be both eligible and qualified. Not everyone who wants or needs a reverse mortgage can get one, it will be determined by your mortgage broker based on your age, equity position, and individual financial circumstances.
At Freestone Mortgage, we understand that navigating these options can be complex. If you aren't finding the information you want when searching "What is a reverse mortgage?" please don't hesitate to call us. Our goal is to empower you through education, transparency, and personalized guidance, ensuring you make informed decisions about your retirement future. Let us help you understand how these loans work and if it could help you meet your goals.
