Your Ultimate Guide to Choosing the Right Reverse Mortgage Plan

Blog Post Image

Reverse mortgages allow homeowners to tap into the equity they've built in their homes and convert it into cash. Instead of making monthly payments to a lender, the lender pays the borrower a lump sum or a series of payments. However, not all reverse mortgages are created equal. There are different types of reverse mortgages, each with their own set of rules and benefits. In this guide, we'll walk you through everything you need to know to choose the right reverse mortgage plan for your needs.

Understand the Different Types of Reverse Mortgages

There are three main types of reverse mortgages: Home Equity Conversion Mortgage (HECM), Proprietary Reverse Mortgage, and Single-Purpose Reverse Mortgage.

The HECM is the most popular type of reverse mortgage and is insured by the Federal Housing Administration (FHA). It's available to seniors aged 62 or older who own their homes outright or have a significant amount of equity in their homes. The amount you can borrow with a HECM is based on your age, the value of your home, and current interest rates.

Proprietary Reverse Mortgages are not backed by the FHA and are offered by private lenders. These types of reverse mortgages are ideal for homeowners with high-value homes who want to access a larger amount of equity. However, they're not as widely available as HECMs and typically come with higher fees and interest rates.

Single-Purpose Reverse Mortgages are offered by some state and local government agencies and nonprofit organizations. These types of reverse mortgages are designed for specific purposes, such as home repairs or property taxes. They're not as flexible as HECMs or Proprietary Reverse Mortgages, but they can be a good option for seniors who need a small amount of cash for a specific purpose.

Consider the Costs

Reverse mortgages come with a variety of costs, including origination fees, mortgage insurance premiums, appraisal fees, and servicing fees. These fees can add up quickly and eat into the equity you've built in your home. When considering a reverse mortgage, it's important to understand all of the costs involved and how they'll impact your equity and your overall financial situation.

Choose a Reputable Lender

Choosing the right lender is crucial when it comes to reverse mortgages. Not all lenders are created equal, and some may try to take advantage of seniors who are not familiar with the process. Before choosing a lender, do your research and make sure they have a good reputation in the industry. Look for lenders who are members of the National Reverse Mortgage Lenders Association (NRMLA), as they have to abide by a strict code of ethics.

Understand Your Responsibilities

One of the most important things to understand when considering a reverse mortgage is your responsibilities as a borrower. You'll still be responsible for paying property taxes, homeowner's insurance, and maintaining your home. If you fail to meet these responsibilities, your lender may be able to foreclose on your home.

Additionally, if you decide to sell your home or move out, you'll need to repay the loan. This means that if you want to leave your home to your heirs, they'll need to repay the loan in full.

Consult with a Professional

Before making any decisions about a reverse mortgage, it's important to consult with a professional. A financial advisor or a HUD-approved reverse mortgage counselor can help you understand the pros and cons of a reverse mortgage and how it will impact your financial situation.

Understand the Risks

Reverse mortgages come with several risks that you should be aware of before taking out a loan. First, because the interest accrues over the life of the loan, the amount owed can quickly grow and deplete the equity in your home.

Second, if you need to move out of the home permanently for any reason (such as moving to a nursing home), the loan becomes due. If you can't repay the loan, the lender may foreclose on the home.

Finally, if you plan to leave your home to your heirs, they may be responsible for repaying the loan. If the loan amount exceeds the home's value, your heirs may need to sell the home to repay the loan.

A reverse mortgage can be a valuable tool for homeowners looking to supplement their retirement income. However, it's important to carefully consider the costs, repayment options, and risks before choosing a plan.

Back to Blog