As people approach retirement, they tend to start considering their options regarding how they can boost their income after their working life ends. One of the routes available to homeowners in the USA is a reverse mortgage – but what exactly are reverse mortgages, and who are they best suited to? This article will explain everything you need to know about these financial products and help you make a decision about whether it’s the right option for you.
In a standard mortgage, such as the kind offered by banks and institutions like Leeds Building Society, the borrower makes monthly repayments on their home loan until the balance is completely cleared. As you might expect, a reverse mortgage is the opposite of that – the lender gives you money for as long as you live in your home, and the debt is repaid either when you die or when you sell your home. The proceeds are usually tax-free and come with no income restrictions. Put simply, it’s a form of equity release, allowing you to access some of the money that’s tied up in your property without the need to sell up and move.
To qualify for a reverse mortgage, you must be at least 62 years of age and own your home outright – that is, there must be no or very little remaining payable balance on your mortgage, and the home in question must be your primary residence. There are three main types of reverse mortgages, as follows:
- Single-purpose reverse mortgages are offered by local government agencies and certain non-profit institutions
- Federally-insured reverse mortgages, also called Home Equity Conversion Mortgages (HECMs), are backed by the US Department of Housing and Urban Development
- Proprietary reverse mortgages are backed by private companies
It’s important to understand the differences between these three types of product in order to figure out which one is best for you. A single-purpose mortgage generally offers the best deal of the three, but as its name suggests, you will need to specify what you are doing with the money (e.g. home repairs or paying property taxes). They are also not available everywhere.
Federally-insured reverse mortgages or HECMs have no restrictions on how you use the money, but they tend to be more expensive than the average home loan – particularly regarding the up-front costs, which also include a meeting with an advisor from a government-approved housing counselling agency. However, you can pay the fee with the proceeds from the loan, and you may qualify to receive the advice for free if you cannot afford it. This site offers a handy way to find a HECM Counselling Agency.
Proprietary reverse mortgages are usually the most expensive, although they may be more suitable for people with a high-value home as you are likely to receive a bigger advance than you would with one of the other options. Both HECMs and proprietary reverse mortgages have conditions regarding how much you can borrow, which include your age, the value of your home and the amount of equity you have.
Remember that the amount you owe on a reverse mortgage gets bigger over time, and interest is charged on the balance on a monthly basis – so your total debt will increase as time goes on. It’s worth shopping around as terms can vary considerably from lender to lender – a HECM counsellor will be able to help you weigh up the costs and benefits of all your options.