How Reverse Mortgages Work
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How Reverse Mortgages Work
The loan amount from a reverse mortgage depends on the borrower’s age (if there is more than one borrower, then it depends on the age of the youngest), current interest rates, and the value and location of the home. The older the borrower is, the more money he or she can receive.
Things To Know
- The older you are, the more money you can receive.
- When you hold a reverse mortgage, you continue to keep title to the home.
- Reverse mortgages involve a number of fees.
There are limits to how much the borrower can draw on. The limit is about 80% of the equity. Should the value of the home rise over time, the borrower will be able to draw out more as well. The government also limits the maximum one can borrow, based on where that person lives.
When you hold a reverse mortgage, you continue to keep title to the home. The lender does not own it during this period.
You have the right to cancel without penalty within three business days. You must notify the lender in writing. The lender has 20 days to return any money you’ve paid for financing.
Your loan balance grows over time
In all, your loan balance comprises the amount you borrow, interest, various fees for servicing, and mortgage insurance premiums. Because you are not making payments on it, it grows larger and larger over time; a regular mortgage, on the other hand, grows shorter and shorter over time. When you die, sell the home, or vacate the home, the balance will be much larger and will become due. Usually, the lender must sell the home in order to pay back the loan. If the borrower’s heirs or someone else steps in and pays back the loan themselves, then the home need not be sold and can pass to the heirs.
If any money remains after the home is sold, that money goes to the borrower or the borrower’s heirs. If any money is still owed to the lender, the borrower or the borrower’s estate is not required to pay it off. That is the risk that the lender takes. The lender is likely to be protected under Federal Housing Administration insurance (which you as a borrower are paying into via a mortgage insurance premium) and can therefore recoup its loss.
Fees
There are several fees involved in a reverse mortgage. Not all lenders will charge all of them:
- Origination fee
- Mortgage insurance premium
- Closing costs
- Servicing fee during the term of the mortgage
- Appraisal fee
- Loan counseling fee
