A reverse mortgage is a type of loan that allows homeowners aged 62 or older, who have generally paid their mortgage, to borrow part of their home equity as tax-free income. Unlike a regular mortgage where the homeowner makes payments to the lender, with a reverse mortgage, the lender pays the owner. A reverse mortgage is a special type of mortgage loan only for homeowners over the age of 62. Watch this two-minute video to see how they work and what you should consider before you apply. With a reverse mortgage, the amount the homeowner owes increases, not decreases, over time.
A reverse mortgage is a loan that allows older people to borrow a portion of their home equity. They then receive that capital in cash, either in an initial sum after closing, through regular monthly payments, or withdrawing funds as needed. In New York, where cooperatives are common, state law also prohibits reverse mortgages in cooperatives, allowing them only in residences and condominiums for one to four families. In fact, just like one of these loans, a reverse mortgage can provide a lump sum or line of credit that you can access as needed, depending on the amount of housing you've paid for and the market value of your home.
Reverse mortgage borrowers must also keep up to date with property taxes and homeowners insurance. Reverse mortgages take part of your home's equity and convert it into payments for you, a kind of prepayment on the equity of your home. You can also refinance a new reverse mortgage with better terms or with a conventional loan, which you could use to pay off the balance of the 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.
With most reverse mortgages, you have at least three business days after closing to cancel the offer for any reason, without penalty. And ask yourself lots of questions to make sure that a reverse mortgage can work for you and that you're getting the mortgage that's right for you. The heirs must decide whether to pay off the reverse mortgage out of pocket (or with another loan) and keep the property or sell the house and use the proceeds from the sale to repay the balance. The mortgage insurance premiums paid by borrowers go to a fund that covers lenders losses when this happens.
Some reverse mortgage sellers may suggest ways to invest your reverse mortgage money, including pressuring you to buy other financial products, such as an annuity or long-term care insurance. During the course of your reverse mortgage, you won't have to make payments to your lender (although you can if you prefer), but you'll need to keep up to date with property taxes, insurance and homeowner association fees, as well as maintain the property. HECM and exclusive reverse mortgages can be more expensive than traditional mortgage loans and initial costs can be high. Rates and charges can vary widely between lenders; the federal government doesn't set reverse mortgage rates.
Variable-rate reverse mortgages are linked to a benchmark index, often the Treasury Constant Maturity Index (CMT). In addition, they should look for the best reverse mortgage companies and not opt for the first lender that their business applies for.
