Ever hear of the term, reverse mortgage loan?
If you’re a homeowner looking for ways to supplement your retirement income, you may have heard of a reverse mortgage. But how does getting a reverse mortgage work? And what makes a good reverse mortgage borrower? Peregrine Financial is an expert mortgage lender in Santa Clarita. Our team can help homeowners understand reverse mortgages - from eligibility and benefits to the application process and repayment requirements.
What Is a Reverse Mortgage?
A reverse mortgage is a type of loan that allows homeowners aged 62 or older to convert a portion of their home equity into cash. Unlike a traditional mortgage, where you make monthly payments to the lender, a reverse mortgage allows you to receive payments from the lender. It differs from home equity loans a bit, too. The loan is repaid when you sell the home, move out permanently, or pass away.
Types of Reverse Mortgages
There are different types of reverse mortgages, but the most common is the Home Equity Conversion Mortgage (also known as a HECM Reverse Mortgage), which is insured by the federal government in the Federal Housing Administration (FHA). Other types include proprietary reverse mortgages, which are private loans offered by lenders, and single-purpose reverse mortgages, which are typically offered by state and local government agencies for specific uses, such as home repairs or property taxes.
How Does a Reverse Mortgage Work?
Eligibility Requirements To qualify for a reverse mortgage, you must:
Be at least 62 years old.
Own your home outright or have a low remaining mortgage balance.
Live in the home as your primary residence.
Maintain the home and stay current on property taxes and homeowners insurance.
Loan Amount and Payment Options
The amount you can borrow depends on factors such as your home’s value, your age, and current interest rates. The older you are and the more equity you have, the more you may be eligible to receive. Reverse mortgage payments can be received in different ways:
Lump sum: Receive a one-time payment at closing.
Monthly payments: Get steady income for a fixed period or as long as you live in the home.
Line of credit: Withdraw funds as needed, with interest applied only to the amount used.
Combination: A mix of the above options to fit your financial needs.
Interest and Fees Interest:
They accrue on a reverse mortgage just like a traditional loan, but instead of making payments, the interest is added to the loan balance. Fees such as origination costs, mortgage insurance, and servicing fees may apply, which can be rolled into the loan amount.
Loan Repayment
A reverse mortgage must be repaid when the borrower sells the home, moves out for more than a year (excluding medical stays), or passes away. At that point, the loan balance—including interest and fees—must be paid off, typically by selling the home. If the home’s value exceeds the loan balance, the remaining equity goes to the homeowner or heirs. If the loan balance is higher than the home’s value, the FHA insurance covers the difference, so heirs are not responsible for the shortfall.
Benefits of a Reverse Mortgage
Provides a source of tax-free income during retirement.
Allows homeowners to stay in their home while accessing equity.
No monthly mortgage payments required.
Loan proceeds can be used for any purpose, from medical expenses to home renovations.
FHA-insured HECMs offer protection against owing more than the home’s value.
Drawbacks of a Reverse Mortgage
Reduces home equity, which may affect inheritance for heirs.
Interest and fees add to the loan balance over time.
Homeowners must continue paying property taxes, insurance, and maintenance costs.
Moving out permanently or failing to meet loan requirements can trigger repayment.
Is a Reverse Mortgage Right for You?
A reverse mortgage can be a great option for homeowners who need extra income in retirement, want to eliminate a traditional mortgage payment, or need to cover unexpected expenses.
If you’re considering a reverse mortgage and want to explore your options, contact our experienced Santa Clarita mortgage lenders at Peregrine Financial. We can answer your questions and help you determine if a reverse mortgage aligns with your retirement plans.
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