Is a Reverse Mortgage a Loan?

People who are 62 or older are eligible to take a reverse mortgage. But is a reverse mortgage a loan, and how does it work? These are usually questions you may ask yourself when considering getting this type of mortgage. Here we will explain all there is to know about reverse mortgages and whether they are good deals or not.

Is a reverse mortgage a loan? The answer is yes. It is like a conventional mortgage, only you take money in reverse. With a conventional mortgage, you take money from a lender to buy a home, while in reverse, you own the home or have big equity, and you are taking the money against that equity.

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Unlike with a traditional mortgage, with the reverse one, you are not making monthly payments to the borrower, but they give you monthly payments. Let’s find out more about this type of loan.

What are Reverse Mortgages? And How Do They Work?

As we explained, people who have already paid off their home or paid off most of the debt can tap into their equity. So you, as a borrower, ask a lender to give you the money you already have in your home equity. This is a program people usually take to have some liquidity in retirement, so they don’t have to sell their homes to get that money. Usually, these loans are never paid off by the borrowers. If the borrower moves or dies, the inheritors sell the house and pay off the loan.

Reverse Mortgage Eligibility

Most reverse mortgages are issued by government-insured programs with strict rules and regulations. Still, there are private lenders that do these types of mortgages. In order to qualify for this loan, the borrower must have at least 62 years. Borrowers can only borrow against the property they’re living in, and this residence can not have any second mortgages or HELOC. To get reverse mortgages, borrowers must pay off all previous mortgages. Also, they must have at least 50% equity or a house that is completely paid off. But if you plan to qualify for a government-sponsored loan, your house needs to be of certain type: 

  • Single-family homes,
  • Manufactured homes built later than June 1976,
  • Condos or townhomes,
  • Multi-unit properties with up to four units.

There Are Three Types of Reverse Mortgages

When applying for a mortgage, especially if it is a government-insured one, there are some rules and criteria you must meet. A lender will check your Fico, and then you will be presented with lending options. Here are three types of reverse mortgages you can apply for:

  • Single-purpose loan – This loan is issued by the government, and it is usually used for home improvements, but these loans are not available in all areas.
  • Home Equity Conversion Mortgage or HECM – This loan is backed up by the US Department of Housing and Urban Development. Money can be used for anything, and you can choose how you wish to get payments (monthly payments or at once).
  • Proprietary loans – Private lenders issue these loans, and they are not insured by the government. A lender will set rules, criteria, fees, and closing mortgage costs.

Reverse Mortgage Costs

Before you get approved for a mortgage, you will have to learn all about the costs you will pay. From mortgage insurance to processing fees and other fees. With reverse mortgages, these fees are not small, but they will usually be part of your loan, so you don’t have to pay for them upfront. Here is all the cost you will pay with HECM.

Name of the feeAmount you will be paying
Mortgage Insurance Premiums (MIP)At the closing of the loan, you will pay 2% and then annually 0.5 of the loan balance.
Origination feeLenders will charge 2% if your home value is up to $200,000 and 1% for the amount over the $200,000.
Servicing feesMonthly fees between $30-$35
Third-party feesIf there is a third party involved, you will be charged fees for their services.

What Are Pros and Cons of This Type of Loans?

As you can see, some fees will be added up to your monthly expenditures, but there are other things you will gain from this loan. Here are the pros and cons of these mortgages.

ProsCons
You don’t need to make monthly payments toward your loan balanceBorrowers must maintain the house and pay taxes.
You can use the money for retirement, healthcare, or anything else.Fees and other costs can be high.
You can take this mortgage to prevent foreclosure.Forces you to take a loan against the equity in your house

Is a Reverse Mortgage a Loan?

As you can see, it is a loan, and many argue that taking these loans can be dangerous at that age. People are usually skeptical and feel like this is a scam to take money from older people. On the other hand, if you are 62 or higher and don’t have a good retirement plan, this can be a great way to keep a house and get monthly payments from the lender to have a secure income. This initial stability is something that draws so many people into taking these loans. And if the borrowers don’t end up repaying the whole loan, people who inherited it can always sell the house to repay it.