Reverse mortgage how do they work

One change was an increase in the up-front premium from 0. The up-front premium used to be tied to how much borrowers took out in the first year, with homeowners who took out the most—because they needed to pay off an existing mortgage—paying the higher rate. Now, all borrowers pay the same 2. All borrowers must also pay annual mortgage insurance premiums of 0. Reverse mortgages are a specialty product, and only certain lenders offer them.

Even though reverse mortgages are federally regulated, there is still leeway in what each lender can charge. Only the lump-sum reverse mortgage, which gives you all the proceeds at once when your loan closes, has a fixed interest rate.

In addition to one of the base rates, the lender adds a margin of one to three percentage points. As of Jan. Interest compounds over the life of the reverse mortgage, and your credit score does not affect your reverse mortgage rate or your ability to qualify.

Here are a few other things you need to know about how much you can borrow:. The government lowered the initial principal limit in October , making it harder for homeowners, especially younger ones, to qualify for a reverse mortgage.

On the upside, the change helps borrowers preserve more of their equity. This is the fund that pays lenders and protects taxpayers from reverse mortgage losses. And if you choose a lump sum, the amount you get up front is all you will ever get. If you choose the line of credit, your credit line will grow over time, but only if you have unused funds in your line. If two spouses live together in a home but only one spouse is named as the borrower on the reverse mortgage, the other spouse is at risk of losing the home if the borrowing spouse dies first.

If the surviving spouse wants to keep the home, the mortgage loan will have to be repaid through other means, possibly through an expensive refinance. Only one spouse might be a borrower if only one spouse holds title to the house, perhaps because it was inherited or because its ownership predates the marriage. Ideally, both spouses will hold title and both will be borrowers on the reverse mortgage so that when the first spouse dies, the other continues to have access to the reverse mortgage proceeds and can continue living in the house until death.

The nonborrowing spouse could even lose the home if the borrowing spouse had to move into an assisted living facility or nursing home for a year or longer.

With a product as potentially lucrative as a reverse mortgage and a vulnerable population of borrowers who may have cognitive impairments or be desperately seeking financial salvation, scams abound. Unscrupulous vendors and home-improvement contractors have targeted seniors to help them secure reverse mortgages to pay for home improvements — in other words, so they can get paid. Relatives, caregivers, and financial advisors have also taken advantage of seniors by using a power of attorney to reverse mortgage the home, then stealing the proceeds, or by convincing them to buy a financial product, such as an annuity or whole life insurance, that the senior can only afford by obtaining a reverse mortgage.

These are just a few of the reverse mortgage scams that can trip up unwitting homeowners. Another danger associated with a reverse mortgage is the possibility of foreclosure. Failing to meet these conditions allows the lender to foreclose. As a reverse mortgage borrower, you are required to live in the home and maintain it. Reverse mortgages are also required to stay current on property taxes and homeowners insurance. Again, the lender imposes these requirements to protect its interest in the home.

A reverse mortgage can be a helpful financial tool for senior homeowners who understand how the loans work and the trade-offs involved.

Ideally, anyone interested in taking out a reverse mortgage will take the time to thoroughly learn about how these loans work. Federal Trade Commission Consumer Information.

Decide which type of reverse mortgage might be right for you. That might depend on what you want to do with the money. Compare the options, terms, and fees from various lenders. Learn as much as you can about reverse mortgages before you talk to a counselor or lender. Is a reverse mortgage right for you? Only you can decide what works for your situation. A counselor from an independent government-approved housing counseling agency can help. This is especially true if he or she acts like a reverse mortgage is a solution for all your problems, pushes you to take out a loan, or has ideas on how you can spend the money from a reverse mortgage.

For example, some sellers may try to sell you things like home improvement services — but then suggest a reverse mortgage as an easy way to pay for them. If you decide you need home improvements, and you think a reverse mortgage is the way to pay for them, shop around before deciding on a particular seller. Some reverse mortgage salespeople might suggest ways to invest the money from your reverse mortgage — even pressuring you to buy other financial products, like an annuity or long-term care insurance.

Resist that pressure. If you buy those kinds of financial products, you could lose the money you get from your reverse mortgage. Some salespeople try to rush you through the process. Stop and check with a counselor or someone you trust before you sign anything. If you feel pressure or urgency to complete the deal — walk away. Do some research and find a counselor or company you feel comfortable with.

With most reverse mortgages, you have at least three business days after closing to cancel the deal for any reason, without penalty. Send your letter by certified mail, and ask for a return receipt. That will let you document what the lender got, and when. Keep copies of your correspondence and any enclosures. If it is not, you may still be eligible for a proprietary reverse mortgage. Pros Depending on your needs and financial goals, a reverse mortgage may benefit you in the following ways: You remain the owner of the home.

Your name stays on the title. You can access your equity without selling the home or paying a monthly mortgage. There are no credit score requirements at this time, though credit history will be reviewed during a financial assessment. You are protected from declining home values since it is a nonrecourse loan. There are no restrictions on how proceeds are spent. In other words, you can use the funds on whatever you want or need. Even after the borrower dies, nonborrowing spouses who are not listed on the mortgage may still live in the home.

They can also refinance that cost into a traditional mortgage. Cons Although there are a number of benefits that come with a reverse mortgage, the loan can also have some points that you will want to consider. If you choose not to make payments, the loan balance will increase over time as interest accumulates. Depending on the type of loan you choose and how you handle your money, you may outlive your proceeds.

While heirs will have a few options for keeping your home after you pass away, you may not be able to pass on the home to your heirs without a cost to them. The loan may come due for several reasons. For example, the loan must be for your primary residence. If you do not live in the home for more than 6 months, the loan could come due. On the same note, a reverse mortgage will come due if you move out of the home or pass away. Both are loans backed by your house that must be repaid to the lender.

With a reverse mortgage, you're tapping the home equity you've built up by getting a loan against it. The funds are given as an upfront lump sum payment, over monthly payments, or as a line of credit that you repay only when you sell the house or pass away. There are no monthly payments. Most reverse mortgages are backed by the Federal Housing Administration and overseen by the Department of Housing and Urban Development.

They are called home equity conversion mortgages HECM. Borrowers: Reverse mortgages were designed for older people to tap their home equity to increase their monthly cash flow without the burden of monthly payments. To qualify for a reverse mortgage, you must be at least 62 years old. Potential borrowers also must go through a home counseling session to ensure that they fully understand the ins and outs of a reverse mortgage. House: Reverse mortgages are for primary residences only. You must live at the property for more than six months of the year.

Generally, the older you are, the more you can borrow. The rule of thumb on the percent you can borrow is your age minus 12, said John Stearns, a senior loan officer with American Fidelity Mortgage Services.

Your lender will evaluate whether you have enough disposable income to meet these obligations. In some cases, lenders may require that some of the equity from the reverse mortgage is set aside to pay those expenses going forward. Reverse mortgages are a negative amortization loan.