Own mortgages versus conversion mortgages with equity

Reverse mortgages provide a way to convert your home equity into liquid cash, either in a lump sum, on a monthly basis, or through a line of credit. For many who struggle with a fixed income, reverse mortgages can provide financial breathing space while still allowing you to continue living in your home. The concept of a reverse mortgage is relatively simple, but there are three different types available depending on your income level. Homeowners who want to borrow a lot of money with more flexibility may want to consider reverse mortgages of their own, as they have few rules. Home equity conversion mortgages (HECMs) offer homeowners more financial protection, and you must go through an FHA-accredited lender to get the loan.

Key Takeaways

• Home reverse mortgages offer the opportunity to borrow larger amounts with less regulation.
• Home equity conversion mortgages (HECMs) offer more protection for homeowners.
• You must use a Federal Housing Administration (FHA) accredited lender for a HECM.
• A private reverse mortgage has a lower initial cost, but the total cost is lower with a HECM.

How a Reverse Mortgage Works

A reverse mortgage is a loan that borrows against the equity in a house. Reverse mortgages are only available to borrowers over age 62 with a significant amount of money equity. After the application, the borrowed money is paid to the homeowner in the form of a lump sum, a monthly payment or a line of credit.

The homeowner must be able to stay current on all property taxes and keep the home in good repair. The loan is repaid if the homeowner dies, sells the home or moves for more than twelve consecutive months. After they leave the house for any of these reasons, the house is sold and the proceeds from the sale are used to pay the loan amount plus interest charges and service charges to the lender.

How a HECM works

Home Equity Conversion Mortgages (HECMs)also known as Federal Housing Administration (FHA) reverse mortgages for older adults are reverse mortgages that the FHA backs. That link with the government entails more regulations, but also a bit of safety for you.

Because HECMs are insured by the FHA, they can only be offered by an FHA-approved lender. They also require each borrower to attend a meeting United States Department of Housing and Urban Development (HUD). mortgage counseling session, where an advisor can help show how the HECM will impact the borrower’s financial life. This helps reduce mortgage scams, which can be a major problem.

The standards for a HECM are simple:

• You must be 62 years or older.
• You must occupy the house, apartment or multi-family home as your primary residence.
• You must have significant equity – usually interpreted as 50% or more.
• You must be able to pay your property taxes and homeowners insurance and maintain the home.
• You may not have any overdue debts.

HECM amounts are based on your net worth and age, the current interest rate, and the lesser of the appraised value or mortgage limit of $1,149,825. This prevents people from borrowing far too much and ultimately ending up in bankruptcy underwater on their mortgage.

The only disadvantage of a HECM is that it comes with additional costs. HECMs are being considered non-recourse loansThis means that even if you borrow more than your available equity, the lender cannot force you to move. To help protect lenders, each HECM requires an upfront payment mortgage insurance premiums of 2% of the total loan at the time of closing, and for the life of the loan, you will be required to pay an annual mortgage insurance premium of 0.5% of the outstanding mortgage balance.

HECMs also require origination fees, such as title fees, valuationsand other necessary loan origination costs. Any service fees are limited to $35 per month.

How a private or Jumbo reverse mortgage works

A own or jumbo reverse mortgage may be best for those with higher value homes. Because a HECM has a limit on the amount you can borrow, home-rich people may want to tap more than the allowable amount. A own reverse mortgage can exceed the FHA limit, although it rarely comes close to borrowing your entire home equity.

Because the FHA does not support its own reverse mortgages, they are not subject to FHA regulations, such as mandatory counseling sessions or advance and revolving mortgages. mortgage insurance payments. While this may seem like a good thing, it also removes the layer of protection for older adults. Mortgage lenders who may not qualify for FHA assistance can offer reverse mortgages of their own.

Home reverse mortgages also tend to have lower prices costs in advance then HECMs. Abolishing mortgage insurance is a big part of this. However, HECMs typically have lower interest rates than proprietary reverse mortgages. You’ll need to do the math to determine which is a more cost-effective option for your specific situation.

Important

Most proprietary reverse mortgages offer a lump sum payment at closing. If you want monthly installments, a HECM is the better choice.

Are proprietary reverse mortgages susceptible to scams?

There are plenty of reliable companies offering jumbo reverse mortgages. However, because there is no requirement for mortgage advice or Federal Housing Administration (FHA) support for the lenderto which they are more sensitive scam. With more valuable homes on the chopping block, there is more incentive to convince older adults to consider reverse mortgages of their own.

Is there an age limit for private reverse mortgages?

Yes. The broad standard for home equity reverse mortgages is age 62, as it is for home equity conversion mortgages (HECMs). However, some companies offer them from the age of 60 or even younger. Contact your mortgage lender to find out the age limit in your country.

Is there a limit to how I use my own reverse mortgage funds?

No. You can use your large reverse mortgage funds to pay off the current mortgage, pay for home repairs, consolidate debt, or even take a vacation. Keep in mind that the borrowed money still has to be paid back if you sell the house or pass away. At that time, your heirs will have to sell the house or repay the loan from other funds.

The bottom line

While HECMs and home reverse mortgages both offer the ability to borrow against your own equity, HECMs do so with more protection for you. HECMs are also much more common than proprietary reverse mortgages, so finding the right lender for a jumbo reverse mortgage can be more difficult. If you have a high-value home and need a significant amount of money, a jumbo reverse mortgage may be your only option. Remember, you should still talk to a trusted advisor about the pros and cons of each type of reverse mortgage.