loans entail. What is a reverse mortgage? In a nutshell, these loans are unique loans designed to help seniors, over 62 years of age, access a portion of the equity in their home.
What Is a Reverse Mortgage? Who Qualifies for These Loans?
Reverse mortgages are very different from traditional mortgage loans. With a reverse mortgage, seniors convert a portion of their home equity into cash. If a borrower still owes money on an existing mortgage loan, this cash must be used to repay the balance of the original loan. Any leftover proceeds can be used however the borrower wishes.
In addition to asking what is a reverse mortgage, many consumers also wonder how these loans differ from forward mortgage loans. What sets these loans apart is that these loans do not become due until borrowers pass away, sell the home, or decide to vacate the residence. The proceeds seniors receive are tax-free and will not affect Social Security or Medicare benefits.
There are three types of reverse mortgages: Home Equity Conversion Mortgages (HECMs), proprietary loans, and single-purpose loans. HECMs are insured by the federal government and make up more than 90% of all reverse mortgages. Proprietary loans are funded by private institutions, and single-purpose loans are funded by nonprofit and other organizations. As the name suggests, single-purpose loans must be used for a specific purpose, which is typically dictated by the provider. Today, proprietary loans and single-purpose loans are very rarely given to borrowers.
To qualify for an HECM, borrowers must be 62 years or older, own their home, and have a small remaining mortgage balance. HECMs are only available on primary residences. Eligible residences include one to four unit properties, as well as approved manufactured homes, condominiums, and co-ops.