As of 2022, when it comes to reverse mortgages there are different types in addition to the HECM, otherwise known as the FHA home equity conversion mortgage. There are now HECM alternative options that have a minimum age of 55 to qualify, the FHA HECM option has a minimum age of 62 and the hybrid option, which is a reverse mortgage option where you make fixed partial interest payments then no payments after ten years, has a minimum age of 60. There are also jumbo and now a second mortgage option available. Fixed rate lump sum reverse mortgages, adjustable lines of credit options, not to be confused with a HELOC, and low fee options, are all now available although not in all states. I made a video explaining the different types of reverse mortgages, you can watch it here.
So which reverse mortgage loan option is the best? It depends on your situation. If you are looking to buy a home with a reverse mortgage than a fixed rate lump sum may be best. Although some people may opt to use the line of credit feature to buy a home if they intend to make monthly mortgage payments. The mortgage payments made can be re-drawn at any time on when having an adjustable-rate reverse mortgage line of credit loan. The amount of payments for redraw depends on which type of reverse mortgage you have, either a HECM loan or the non-HECM loan alternative. Each loan has different guidelines attached to them. It’s important that you work with an experienced reverse mortgage loan originator who offers both the HECM program and its alternatives. Many times I get questions like “what is a reverse mortgage or how do reverse mortgages work.” It’s important that your loan consultant can break down the differences between types of in simple to understand terms and explain the pros and cons of each loan option. If you would like to have funds set aside for future usage, then a reverse mortgage line of credit may be better. The low fee reverse mortgage may be best for a short – term solution.
Reverse mortgages are no longer a loan of last resort or for just desperate people. The loan has become a Swiss Army Knife type of financial tool being used for a multitude of reasons. Affluent people use the adjustable line of credit option as a bucket of money not in the market to dip into when their investments are down or to minimize income taxation. Others may use it as a resource to do home improvement to their home, or to eliminate the existing first mortgage balance by paying it off with a reverse mortgage so that they no longer have a monthly mortgage payment. A silver or grey divorce can employ a reverse mortgage to help a spouse who wants to stay in their home, to pay off the departing spouse. The spouse staying in the home can income qualify with a reverse mortgage versus a conforming forward mortgage since it doesn’t use debt to income ratios to qualify. Using reverse funds to help their kids and grandkids and paying for in home healthcare expenses are other reasons people use reverse mortgages.
There is a tradeoff for not having to make mortgage payments on a reverse mortgage. The monthly interest and charges that accrue that go unpaid gets tacked on to the balance of the loan which makes the loan balance rise over time. You can make a payment in any amount as often as you want on a reverse, as many people do for estate planning reasons. The tacked-on amount to the balance gets paid when the loan gets refinanced, or the home is sold. In the event you end up owing more than the home is worth, the lender can’t come after you or your heirs for the difference. All reverse mortgages are non-recourse loans which means you are not responsible for the shortage. Depending on the type of reverse mortgage, either the lender has insurance that covers them for the shortage, or the lender will simply absorb the loss. The reverse mortgage lender will typically lend 50% or less of the property value to protect against dropping real estate values and the rising loan balance.
A lender uses three main factors when determining the loan amount, the age of the youngest borrower, the equity in the home, and prevailing interest rates. The higher rates are, the lower the loan amount. The older the borrower, the higher the loan amount. An algorithm is used to determine each unique loan amount. A lender may approve possibly 35% of the property value for a reverse mortgage loan for a 55-year-old but approve 55% of the property value for an 85-year-old. There’s not a one size fits all loan amount.
It’s important in addition you employ a loan originator who not only is familiar with the HECM but also with the HECM loan alternative programs and be able to show a side-by-side comparison of both types of loans and be able to explain them in simple to understand terms.
I work for a loan brokerage that offers all of these loans, and am knowledgeable, ethical and have your best interest at heart, feel free to contact me with any questions or concerns. I lend only in California at this time.
Feel free to watch my video on the different types of reverse mortgages and after viewing you can click on the “tell me your scenario” and let me know your situation or give me a call, I’m here to help.
Warm regards,
KW