What Is a Reverse Mortgage? Covering the Basics

What is a reverse mortgage? This question is one commonly asked by retirees and pre-retirees looking for ways to add to their retirement savings. According to a recent article in the Washington Post, reverse mortgages “can be a good option for seniors,” sometimes even more favorable than forward mortgage loans. MSN Money also credits reverse mortgages with keeping “aging homeowners out of the poorhouse.” With so much media attention, many consumers are left wondering what is a reverse mortgage? rnWhat Is a Reverse Mortgage? Who Qualifies? For those asking, “What is a reverse mortgage?” the simple answer is that a reverse mortgage is a special type of loan that allows seniors to withdraw a portion of their home equity. For borrowers who still owe money on a forward mortgage loan, their loan proceeds must be used to repay their original loan. Any extra proceeds will be given to the borrower in one lump sum, in monthly payments or as a line of credit. This money is tax-free and can be used however the borrower sees fit. In addition to providing cash, reverse mortgages let seniors defer payment until they die, sell their home or live outside of their home for one year. If there are two borrowers, both must pass away before the loan must be repaid. So while borrowers will still need to pay their homeowners insurance and property taxes, they might never have to make another mortgage payment for the rest of their lives. This, plus the extra cash, can leave retirees in a much better position during retirement. Of course, to get a reverse mortgage, seniors must meet several qualifications. Seniors must be at least 62 years of age and cannot have any outstanding federal debt. Borrowers must also have enough equity in their home that their loan proceeds will cover their existing mortgage balance. The amount of equity seniors need to qualify will primarily depend on their age and property value. What Is a Reverse Mortgage in Relation to an HECM? While many seniors wonder what is a reverse mortgage, few seniors realize that there are several different loan products available. Seniors who own properties valued at over $625,500 might benefit from a jumbo or proprietary reverse mortgage. However, over 90% of borrowers choose to get a Home Equity Conversion Mortgage, or HECM. HECMs are insured by the Federal Housing Administration (FHA), carry low interest rates and are limited to a maximum claim amount of $625,500. Seniors who want a federally-insured reverse mortgage must choose from three different loan products: the HECM Standard, HECM Saver and the HECM for Purchase. The Standard provides the highest payouts but also carries a large upfront mortgage insurance premium (MIP) equal to 2% of the claim amount. The HECM Saver only carries an upfront MIP of 0.01% but provides slightly reduced payouts. The HECM for Purchase is quite different from both of the previous options. This product allows seniors to purchase a new primary residence while simultaneously taking a reverse mortgage. Like the Standard and the Saver, the HECM for Purchase program leaves seniors free of a mortgage payment and often provides extra cash. Seniors interested in using their home equity to supplement their retirement should carefully consider all of their options before choosing the best loan product to meet their needs.