The biggest advantage of a reverse mortgage is that making monthly payments is optional, as long as you keep your property taxes, insurance, and upkeep current. The loan can even pay you each month. The loan balance only comes due when the last borrower dies or leaves the home.
Taking out a reverse mortgage early – homeowners become eligible once they turn 62 – can help boost retirement savings, and maximize the benefits via a guaranteed-to-grow line of credit on any unused funds.
But what if you take out a reverse mortgage, only to see interest rates drop a few years down the road? Are you stuck with the higher rate?
Not necessarily. You can refinance a reverse mortgage, just as you can a traditional mortgage. A reverse mortgage refinance can be the right move if interest rates dropped, your home has appreciated significantly in value, or you want to add your spouse to the loan.
But there are pros and cons to refinancing a reverse mortgage. Learn what’s involved, including the related fees and steps required.
What is a reverse mortgage?
Unlike a “forward” mortgage, in which your equity increases as you make monthly payments on the loan, a reverse mortgage enables you to take money out of the home in the form of a lump sum, a line of credit, monthly cash advances, online installment loans South Carolina or a combination of monthly advances and a line of credit.
“Fortunately, you don’t have to make payments on your reverse mortgage,” said Khari Washington, a real estate and mortgage broker with 1 st United Realty Mortgage, Inc., in Riverside, California. “Instead, the money has to be repaid when you leave or sell the home.”
You can continue to make payments if you choose. But you’re not obligated to, as long as you pay your property taxes and homeowners insurance and you maintain the home. If you stop paying taxes or insurance, or you let the home fall into disrepair, the lender can foreclose on the home.
Three types of reverse mortgages
- : This is the most common type of reverse mortgage. It’s backed by the Federal Housing Administration (FHA), a division of the U.S. Department of Housing and Urban Development (HUD), and it’s offered through private lenders who are approved by the FHA.
- Proprietary reverse mortgage: These are offered through private lenders and are not government-insured.
- Single-purpose reverse mortgage: Typically offered through local municipalities, these may be used for a specific purpose, such as repairs on the home.
For the purposes of this article, “reverse mortgage” refers to HECM loans. How much you can get in a reverse mortgage depends on several factors, including your age, the amount of equity you have, and the appraised value of the home.
Who can get a reverse mortgage?
Reverse mortgages are only available to homeowners who are 62 and older. If you’re 62 but your spouse is 60, you could take out a reverse mortgage but they would not be able to be on the loan.
To ensure they could stay in the home if you pass away or move into assisted living, you have two options: you can name them as a non-borrowing spouse when you take out the loan, or you can refinance to add them to the mortgage when they turn 62.
In addition to the age requirement, homeowners must have significant equity in their homes – typically 50% or more, though lenders may be able to approve you with less, depending on the circumstances.
The home must be your primary residence to qualify for a reverse mortgage, meaning it is where you live most of the year.