Sometimes we need a little extra money to help cover the cost of home repairs or significant life events such as a new car or university tuition. A reverse mortgage is an excellent way to access the equity in your home without having to sell or take out a bank loan.
A reverse mortgage is a loan that allows you to access the equity in your home. Reverse mortgages are distinct in that they have very long terms (around 40 years) and are heavily government regulated. The only official government endorsed reverse mortgage providers are HomeEquity Bank (CHIP Mortgage) and Equitable Bank (STEP Mortgage). A mortgage broker can help you decide between these two providers and explore other options. Alternative mortgage lenders can also provide mortgages that can serve the same purpose as an official reverse mortgage. You can borrow up to 55% of the current value of your home with a reverse mortgage. The loan is paid back when you move out of your home, sell it or the borrower dies.
It’s important to remember that the longer you go without making payments, the higher the interest. The payout of a reverse mortgage can be a one-time lump sum, or you can receive some money upfront and the rest over time.
Who Qualifies For A Reverse Mortgage?
The key requirements for a reverse mortgage is that the homeowner must be 55 or older with more than 45% equity in the home. This is different from a more traditional bank mortgage that will consider your income, employment and credit score.
Private lenders will have different criteria from banks. A private mortgage lender can approve your mortgage request based on your equity regardless of all other issues. Private mortgages can go up to 75% in large cities and 65% in smaller towns. Private mortgage agreements can be tailor made to provide a consistent flow of income in a similar way to bank provided reverse mortgages.
You may not qualify for a reverse mortgage if you have outstanding debts or liens on your home such as a Home Equity Line of Credit (HELOC). Having a reverse mortgage may prevent you from accessing a HELOC later on.
What Kind Of Reverse Mortgage Alternatives Are There?
- Home Equity Line of Credit – A HELOC is similar to a traditional line of credit, allowing you to borrow money whenever you want up to a certain credit limit. This type of line of credit is secured against the value of your home.
Private First and Second mortgages
- First Mortgage – A first mortgage puts a first lien position on the property that is secured by the mortgage. Private mortgages are ideal for people who want to borrow money for immediate expenses and not be saddled with a long-term loan. Most private mortgages range from 1 to 3 years. Homeowners are not required to pay the mortgage principal down. The borrower pays the interest payment each month instead. These types of loans are a good option for people who need a short term loan, have bad credit or have irregular cash flow that would cause a traditional lender to refuse them.
- A second mortgage is conjunction with a first mortgage and puts a second lien on the property. A second mortgage can be a great tool for consolidating debt, funding home renovations, or act as a bridge loan. A second mortgage avoids the breakage penalties of your first mortgage. Single-purpose reverse mortgages – These loans are for a specific purpose agreed upon by the lender and the borrower for home expenses or paying tuition. These are the easiest reverse mortgages to obtain.
How Can I Use A Reverse Mortgage?
A reverse mortgage offers many advantages over a traditional bank loan, allowing you to use the equity in your home to pay off debts or cover the cost of expenses.
You can use a reverse mortgage to:
- Pay for home repairs and upgrades
- Help pay bills
- Cover emergency health care expenses
- Repay debts
How Is A Reverse Mortgage Rate Determined and What Are The Rates?
Mortgage providers can lend up to 55% of the appraised value of a property. For an example property with an appraised value of $1,000,000 and an existing $200,000 first mortgage, a typical reverse mortgage would provide a lump sum of $200,000 to pay out the first then provide $2,000 per month to the homeowners.
Reverse mortgage rates will vary by lender. Traditionally reverse mortgage rates will range between 4.75 percent and 6 percent. Your qualification factors will determine the interest rate you will pay. There may also be legal fees and administrative costs associated with finalizing a reverse mortgage that can range from $1,000 to $2,000.
Additionally, homeowners should expect to cover the costs of:
- Home appraisal
- Admin/Set-Up Fees
- Penalties for paying off the reverse mortgage early
Length of a Reverse Mortgage
Government approved reverse mortgages can last up to 40 years. The loan immediately becomes due when:
- The home is sold
- The borrower has not lived at the property for at least six months
- The borrower dies
- Taxes are no longer being paid on the property
- Condo fees have stopped being paid
What Are My Responsibilities When I Get A Reverse Mortgage
When you receive approval for a reverse mortgage you will be expected to repay the debt on time. You will also be expected to maintain the equity value of the home. Homeowners should continue to keep up with home repairs and maintenance. All condo fees, if applicable, should continue to be paid. If your situation changes, it is expected you will contact your lender to renegotiate the terms of the reverse mortgage.
Is An Interest Accruing Mortgage A Better Option Than A Reverse Mortgage?
Depending on your situation, interest accruing mortgage may be another option to help free up funds. In an interest accruing mortgage, all interest payments are added to the mortgage balance instead of being payable each month. Interest accruing mortgages are a good option for people under the age of 55.
Interest accruing mortgages have a shorter term than reverse mortgages. If you need money fast, you can generally receive a lump sum payment rather than installments.
Borrowers should be aware that this type of mortgage does have higher interest rates and fees.