Many older homeowners look for ways to leverage their primary residence to cover their financial needs and fund their future plans. For years, the solution meant selling, refinancing or adding a second mortgage home equity loan or line of credit.
As lending guidelines became more stringent after the excesses of the past, seniors gained another option to consider: the reverse mortgage. Compared to a standard refinance, homeowners' income and credit scores are not considered the same way by lenders when they determine the amount that can be borrowed and what the interest rate will be.
So, how does a reverse mortgage work?
A reverse mortgage is a special type of home financing available to homeowners 62 years or older. It allows them to access some of their built-up equity, which can either be paid out in a lump sum to the homeowner or be received in monthly payments as “income.” It’s their choice.
The technical term for a reverse mortgage is a Home Equity Conversion Mortgage. HECMs are federally insured and highly regulated, which makes them far safer for homeowners than in days gone past.
And the older the homeowner, the more of the home’s equity will be available.
Contour Mortgage’s own Reverse Mortgage Specialist Sal Zangari has been helping a wide range of clientele for more than 20 years. “The government will allow a homeowner to take approximately 60 percent of the initial principal limit in the first year,” he says. “If the amount they owe on an existing mortgage (or other required payments) is more than 60 percent of this limit, they can take out enough to pay off their mortgage plus cash of up to 10 percent of the initial principal limit.”
Because the interest rate and closing costs are usually lower on a standard refinance (or CEMA mortgage) than on a reverse mortgage, many seniors opt for that method first. If a homeowner prefers to receive a lump sum or a monthly check without having to make a monthly repayment, a reverse mortgage is a great option to consider.
What are some benefits of getting a reverse mortgage?
Contour’s expert, Sal Zangari, says that one of the benefits of getting a reverse mortgage is the non-existent monthly payment because homeowners are only responsible for paying monthly property taxes and homeowner’s insurance. The funds they receive through the reverse mortgage are owed to the lender (with interest) and paid off after the homeowner or qualified spouse sells the home, moves out, or passes away. Their heirs also have the option of paying off the balance (plus interest) and continuing to own the home, or they could sell it, repaying the balance owed and keeping any surplus.
Here’s another important benefit to a reverse mortgage. If the balance owed on the house is greater than the home’s value, NO ONE has to pay the difference. That’s the risk the lender takes. It would not affect the homeowners or any heirs—they are totally protected from any additional cost.
Furthermore, as Zangari points out, “Retirees typically use cash to supplement their income, pay for health care expenses, pay off debt, make home improvements, or open a line of credit in case of an emergency.”
A reverse mortgage lets them meet these expenses.
What do I need to qualify for a reverse mortgage?
Reverse mortgage applicants have to provide certain documentation to a mortgage lender or a bank in order to be approved. According to Zangari, the requirements have changed. “With recent guideline changes,” he says, “the banks now require seniors to submit ‘income documentation’ that will enable the investor to determine whether or not the homeowner can afford paying the taxes and insurance on the property as time goes on.”
Documentation needed to qualify for a reverse mortgage includes:
- Tax Returns
- Social Security Award Letters
- Pension Award Letters
- Rental Income
Staying up-to-date on requirements like this—not just with reverse mortgage qualifications, but other mortgage loan options—is much easier when you can rely on a reputable mortgage loan officer to keep you informed.
That’s why it’s important to get all the details you need in order to determine what the best financial decision is for you.
“Take the time to fully understand your options as the reverse mortgage is a great financial product,” advises Zangari. “But just like many other products or programs, it is not for everyone.”
Luckily, Contour can answer any questions you’re facing and offer you exceptional reverse mortgage solutions.