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What Is a Reverse Mortgage, and How Does It Work?

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Reverse Mortgage

A reverse mortgage is a type of loan that permits homeowners aged 62 or older to borrow against a portion of their home’s equity.

The functioning of a reverse mortgage differs from that of a traditional mortgage loan. Instead of the borrower making payments to the lender, the lender provides payments to the borrower.

Initially, the loan pays off any outstanding mortgage, if applicable, and the remaining funds can be utilized at the borrower’s discretion. It is important for the homeowner to continue paying property taxes and homeowners insurance, as well as maintaining the property.

These loans cater to older homeowners who may have retired and wish to eliminate their monthly mortgage payments or supplement their income.

Types of Reverse Mortgages

Home Equity Conversion Mortgage (HECM)
The most prevalent reverse mortgage option is the Home Equity Conversion Mortgage (HECM). It is a type of reverse mortgage that benefits from insurance provided by the Federal Housing Administration (FHA).
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Single-Purpose Reverse Mortgage​
A single-purpose reverse mortgage is generally more cost-effective than an HECM, but it comes with certain limitations. True to its name, this type of reverse mortgage only permits funds to be used for a specific purpose.
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Jumbo Reverse Mortgage
For loan amounts exceeding $1,089,300 in 2023, a jumbo reverse mortgage, also referred to as a proprietary reverse mortgage, becomes necessary. As a larger loan entails increased risk, lenders may impose higher fees
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To be eligible for a reverse mortgage, certain requirements must be met:

  • The homeowner must be at least 62 years old.
  • The reverse mortgage can only be taken out on the primary residence, not a second home or vacation property.
  • To obtain a home equity conversion mortgage (HECM), the U.S. Department of Housing and Urban Development (HUD) mandates attendance at a reverse mortgage counseling session. Additionally, a financial assessment is conducted to ensure the borrower can fulfill the financial obligations of the loan.
  • Federal debts, such as student loans or income tax, cannot be owed.
  • he property must meet the specified standards set by the real estate industry.