How does a Reverse Mortgage Work?
When considering a reverse mortgage there are three types offered. The most suitable reverse mortgage will vary for each applicant and will be dependent upon the homeowner(s) age, value of the home and amount borrowed against the home’s equity.
- Home Equity Conversion Mortgage (HCEM): A reverse mortgage that is insured by the Federal Housing Administration (FHA), a division of the U.S. Department of Housing And Urban Development (HUD). This is the most common type of reverse mortgage.
- Single Purpose Reverse Mortgage: A reverse mortgage that is offered by state and local government agencies and/or non-profit organizations. Loans are available to seniors whose property is located within a specific geographic region.
- Proprietary Reverse Mortgage: A reverse mortgage that is offered by a private reverse mortgage company.
There are four payment options to consider when applying for a reverse mortgage. Lenders consider the applicant’s age(s) during the application process in an effort to include life expectancy data when calculating loan payment amounts. Through a reverse mortgage, the borrower(s) may receive a lump sum payment, monthly payments for life, payments for a specified period of time or a line of credit. It is also possible to create a combination of these options, if offered by the lender.
- A lump sum payment allows the borrower(s) to receive the full amount of the reverse mortgage loan in a single payment.
- Tenure payments allow the borrower(s) to receive the amount of the loan through equal monthly payments. Monthly payments would stop upon death or relocation. If the reverse mortgage was secured by two individuals, monthly payments would continue until the death or relocation of the second borrower.
- Term payments allow the borrower(s) to receive the amount of the loan through equal monthly payments over a specified period of time.
- A line of credit allows the borrower(s) to receive payments at any time and in any amount until the line of credit is exhausted.
Borrowers can use reverse mortgage loan payments for any purpose, including home expenses and maintenance, taxes, fees, insurance and/or a vacation.
As with any financial product, carefully review the terms and conditions of a reverse mortgage. The Truth in Lending Act is a federal law that requires lenders to inform consumers about the terms of a loan and how the costs associated with borrowing are calculated. If there is language in the contract that is ambiguous or confusing, talk to the agent and/or company offering the reverse mortgage for an explanation and additional information, if necessary.