If you have ever heard of a home equity conversion mortgage (HECM) then you have heard of a reverse mortgage because they are the same thing. And, if you have heard of them, you have probably heard that they are a favorite mortgage type among retirees, but why is that? What makes reverse mortgages so special? Here is a brief overview of the reverse mortgage application process which will help you understand the difference between an HECM and a traditional home loan.
Types of Homes Which Qualify for Reverse Loans
The first thing you must know about reverse mortgages is that owning a building does not mean you can automatically qualify for such a loan. The building you own must be a private home or a condominium with four apartments or less in it. You must also live in the building yourself and use it as your primary residence. Additionally, the home must be valuable enough to warrant a lender loaning money based on its equity. That is one reason why a home with an existing mortgage is ineligible unless you are willing to use some of the HECM money to pay the first loan off right away.
Personal Qualification Requirements for Reverse Mortgages
On a personal level, you must be at least 62 years old in order to obtain a reverse mortgage on your home. Also, it must be your primary residence, not a secondary living space like a vacation home. Additionally, you must live in it, so you can’t obtain a reverse mortgage on a rental property unless you also continue to live in the home at the same time as your renters. In the event that you are signing the loan with someone, such as your spouse, that person must also be a resident of the home and must also be at least 62 years of age.
Why Reverse Mortgages Are Beneficial
One reason a reverse mortgage may be beneficial to you is that you will have flexibility over the payments you receive from your home equity. You can get a lump sum right away when you need it, or you can set up your reverse mortgage to pay you a little bit each month. In some cases you may also be able to set up a line of credit, allowing you to borrow exact amounts against your home value when you need them.
Another reason why reverse loans of this nature are considered beneficial is that they don’t have the same rigid repayment structure as traditional loans. Therefore, if you get an HECM, you won’t have the added financial burden of an extra ongoing bill each month. In fact, depending on your established loan terms, you may actually receive payments from one month to the next.
Federally-Controlled Versus Private Reverse Mortgage Lenders
There are several reverse mortgages available through federally-controlled lenders such as the jumbo reverse mortgage program. However, private reverse loan lenders are also in operation. Most legitimate private lenders charge higher fees than government-sanctioned lenders. You must also be careful when choosing a lender because some scam artists masquerade as legitimate lenders of reverse home loans.
How a Reverse Mortgage May Impact Your Family
You must consider your family when deciding whether or not to obtain a reverse mortgage. Although your family members’ assets will be safe if you pass away while there is still a loan balance, your home itself will not. Your family members will be faced with the decision of whether or not to pay the balance or allow the sale of the home. Therefore you must ask them if they would be willing or able to cover the loan balance in the event of your untimely death. You must also consider the fact that your family may not receive any money if the home is sold unless the amount of the sale is higher than the remaining loan balance.