Reverse Mortgage Vs. Home Equity Loan


Reverse mortgages

Reverse mortgages are one of the many types of home loans seniors should choose to access the equity in their home. Although Rocket Mortgage® does not offer reverse mortgages at this time, we want you to be aware of all your options. Let’s break this down.

Reverse Mortgage Basics

A reverse mortgage is designed to allow homeowners aged 62 and over to tap into the equity in their home without a monthly mortgage payment – although you are still responsible for paying your taxes and your home insurance and maintenance. of the House. There is no minimum credit score and the amount you can borrow is based on the age of the youngest borrower or non-borrowing spouse as well as the amount of equity you have.

If you have an existing mortgage, it is paid off and you get the rest of the funds you were approved for. A financial assessment is done to make sure you have the money to handle property taxes, home insurance, and maintenance. If necessary, money is set aside from your loan proceeds to meet these expenses.

Reverse mortgages come with fixed or adjustable interest rates, and you can receive your money in one or more ways.

  • Lump sum payment: You can get your money in one check and use it for all your expenses. This is a fixed rate option. The others are based on an adjustable rate.
  • Mandate: Equal monthly payments are split as long as you live in the house.
  • Term: You receive equal monthly payments for a fixed period.
  • Credit line: You can turn your existing equity into a line of credit so you have money available for projects or other expenses when you need it. You also have the option of putting money back into the line of credit so you can access it later.
  • Amended mandate: It’s a combination of a line of credit and fixed payments for as long as you’re in the house.
  • Modified term: This combines a line of credit with fixed payments for a certain period.
  • Purchase house: Do you want to be closer to the grandchildren or reduce the size of your house? You can use money from a reverse mortgage to buy a new home without having to pay a monthly mortgage. The need for a down payment will depend on the amount you are approved for.

The most common type of reverse mortgage is the home equity conversion mortgage (HECM). There are other types, including one-time and exclusive reverse mortgages, that may be offered by lenders, but HECMs are federally backed by the FHA.

A HECM is a non-recourse loan, which means you will never owe more than the value of your home. Your heirs are never held responsible for reimbursement. If they want to keep the house after the last borrower or non-borrowing spouse is gone, they can buy it for the balance or 95% of the appraised value, whichever is lower. They can also refinance a traditional mortgage and stay in the house.

If they don’t want to keep the house, they can sell it and pay off the balance while keeping the rest of the proceeds. If they don’t want to deal with a sale at all, they can return the property to the lender with no impact on their credit. It is important to note that single use and exclusive mortgages may have different terms.

Benefits of a Reverse Mortgage

Reverse mortgages have several unique advantages.

  • No minimum credit score: Your past financial history is not held against you.
  • No monthly payments: You have no monthly payment. On the contrary, you are the one who is paid until you are no longer at home.
  • HECM loans available: Home equity conversion mortgages are federally backed and your heirs are not financially responsible for the loan after you die.
  • Flexibility: You can get the funds as a lump sum payment, monthly payments, a line of credit, or even use it to buy another home.

Disadvantages of a reverse mortgage

There are also downsides to this option.

  • Costs can add up: In addition to closing costs, there may be service fees, financial appraisal fees and others. The monthly fee is part of your balance.
  • Funds may run out: It’s possible to live long enough to outlive your profits or spend them irresponsibly. When this happens, you may not have additional equity to fall back on. Most lenders try to avoid this by requiring you to have a certain amount of equity before taking out the loan. This is also why, in part, HECM borrowers are required to follow financial advice.
  • Other housing costs: You still have to pay property taxes, home insurance and maintenance. If you fail to meet these responsibilities, your loan could expire.
  • Confusing Loan Terms: There are many different types of reverse mortgages, so it’s important to know what you’re getting yourself into. If you are applying for a federally supported HECM, you will go through the required financial counseling. No matter what you’re considering, it’s not a bad idea to speak with a financial advisor.

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