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Unlocking your home’s value: The basics of how reverse mortgages work

For many older homeowners, remaining in their homes long-term is a top priority. If you’re looking for financial security and to stay in your residence, you may find that a federally insured reverse mortgage loan can be a powerful financial tool. Reverse mortgages can offer a valuable source of cash, allowing you to access the equity in your home without having to sell or move.

In this blog, we’ll take a closer look at the basics of reverse mortgages, including their benefits and drawbacks, to help you make an informed decision about whether a reverse mortgage is right for you.

What’s a reverse mortgage?

If you’re a homeowner over 62, a reverse mortgage loan allows you to access your home equity and turn it into tax-free cash—while you continue to live in and own your home.

A reverse mortgage differs from a Conventional mortgage, where a homeowner makes monthly mortgage payments, gradually decreasing the principal balance and increasing home equity. With a reverse mortgage, we make payments to you, and your loan balance grows with each one.

A monthly mortgage payment isn’t required for a reverse mortgage as long as you pay your property taxes, insurance and applicable HOA dues. However, just like any mortgage, the loan must be repaid when the borrower passes away, sells the home or moves out.

Reverse mortgage qualifications and requirements

If you’re interested in a reverse mortgage loan, the first step is to meet with a HUD-approved counselor and undergo a financial assessment and counseling session to determine if this is the right loan solution for you.

To be eligible, you must meet these five qualifications:

1. You must be 62 years of age or older

A younger spouse or occupant of the home may be able to participate in the program in some states.

2. You own your home and use it as your primary residence

A primary residence is the main home where you and your family live. It’s the place where you spend the majority of your time and where you receive mail and pay your bills. Reverse mortgages can’t be used for rental properties, second homes or vacation homes.

3. The house is single-family, multi-family (up to four units) or an approved condominium or manufactured home

For a multi-family home (up to four units), you may qualify for a reverse mortgage as long as you occupy one of the units.

4. You own your home free and clear or have a small amount left to pay on the existing mortgage

Borrowers must also be current on all federal taxes and settle any tax debts.

5. Your home is in good condition before taking out the loan

A home appraisal and inspection may be performed on the property.

Types of reverse mortgages

According to the Consumer Financial Protection Bureau (CFPB), there are several types of reverse mortgages. The most popular are home equity conversion mortgages (HECMs)* insured by the Federal Housing Administration (FHA). A HECM is a federally insured reverse mortgage that allows qualifying homeowners to access the equity in their property and use it to supplement retirement income.

Pros and cons of reverse mortgages

While a reverse mortgage can be a valuable financial tool, it’s essential to understand the potential benefits and drawbacks to make an informed choice about whether it’s the right option for you and your retirement goals.

There are several potential benefits to a reverse mortgage:

  • Convert your home equity into cash

    Reverse mortgages can give you greater flexibility in using your home equity.

  • No more monthly mortgage payments

    Unlike a Conventional mortgage, a reverse mortgage does not require monthly payments.

  • Use the funds for anything you choose

    These funds can be used as supplemental income however you choose. Common uses include saving for retirement, vacationing, improving your property or paying for medical expenses.

  • Stay in your home

    You’re still the owner of your home, and your equity is protected up to the loan amount. A reverse mortgage can also help address your concerns about the high cost of downsizing or relocating.

  • The loan doesn’t have to be repaid

    As long as you live in your home and meet your loan terms, repayment is deferred until you sell or no longer use the home as your primary residence.

  • It’s a non-recourse loan

    This means you’ll never owe more than your home is worth.

While there are many benefits to a reverse mortgage, there are also several drawbacks. Here are some of the most common cons:

  • Higher costs

    Reverse mortgages can give you greater flexibility in using your home equity.

  • Reduces your home equity

    Since the loan balance typically grows over time as interest and fees accumulate, a reverse mortgage can decrease the equity you have in your home. In addition, failing to maintain your home or make necessary repairs can lower its value and potentially reduce the amount of equity available.

  • Use the funds for anything you choose

    These funds can be used as supplemental income however you choose. Common uses include saving for retirement, vacationing, improving your property or paying for medical expenses.

  • The ongoing costs of homeownership don’t go away

    If you’re unable to meet the obligations of a reverse mortgage, such as paying property taxes or maintaining homeowners insurance, you may be at risk of foreclosure.

  • It may impact retirement benefits like Medicaid or Supplemental Security Income (SSI)

    A detailed discussion with a HUD-approved counselor will give you important information to help you decide whether a reverse mortgage is right for you. To get the most out of your counseling session, CFPB recommends coming prepared to discuss your financial needs and goals and the circumstances leading you to consider a reverse mortgage.

Difference between a reverse mortgage and a home equity loan

Another way to borrow cash against your equity is through a home equity program. A HELOC is a line of credit secured by your home. You can use your revolving credit line for large purchases such as tuition, renovations and emergency expenses. A home equity loan (HELOAN) provides up to 95 percent of your home’s equity as a piggyback second mortgage.

Guild Mortgage’s reverse mortgage program

Discover how much you may get from a reverse mortgage with the Guild Mortgage reverse mortgage calculator, then let’s connect.

Important information:

At the end of the reverse loan term, some or all of the property’s equity won’t belong to the borrower, and they may need to sell or transfer the property to repay the proceeds of the reverse mortgage. Guild will add the applicable reverse mortgage origination fee, mortgage insurance premium, closing costs, or servicing fees to the balance of the loan which will grow, along with the interest, over time. Interest isn’t tax deductible until all or part of the loan is repaid. Failing to pay property taxes, insurance, and maintenance might subject the property to a tax lien, foreclosure, or other encumbrance since the borrower retains the title.

*Fixed-rate and adjustable-rate reverse mortgages are insured by the FHA. Fixed-rate loans are distributed in a single lump sum with no future draws. Adjustable-rate reverse mortgages offer five payment options and allow for future draws. The age of the youngest borrower determines the amount of funds that can be received with a reverse mortgage loan. The amount of funds that can be received during the first 12-month disbursement period is subject to an initial disbursement limit.

These materials are not from HUD or FHA and were not approved by HUD or a government agency.

The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.

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About the Author: Guild Mortgage

Founded in 1960 when the modern U.S. mortgage industry was just forming, Guild Mortgage Company is a nationally recognized independent mortgage lender providing residential mortgage products and local in-house origination and servicing. Guild’s collaborative culture and commitment to diversity and inclusion enable it to deliver a personalized experience for each customer. With more than 4,000 employees and over 250 retail branches, Guild has relationships with credit unions, community banks, and other financial institutions and services loans in 49 states and the District of Columbia. Guild’s highly trained loan professionals are experienced in government-sponsored programs such as FHA, VA, USDA, down payment assistance programs and other specialized loan programs. Guild Mortgage Company is a wholly owned subsidiary of Guild Holdings Company, whose shares of Class A common stock trade on the New York Stock Exchange under the symbol GHLD.