With close to 44 million retired workers in the United States and millions more preparing to retire in the next few years, paying for retirement is a hot topic in this country. Many Americans have only $17,000 in savings when they leave the workforce and need to look at other sources of income to support themselves. If they own a home, they may have the solution literally under their roof. So- how does a reverse mortgage work? A reverse mortgage in Oregon is one way that local retirees can have all they need during their golden years.
At times, reverse mortgages have been subject to harsh criticism. Some myths have even developed surrounding these home loan options, scaring many borrowers away. However, for a significant number of older Americans, their home is their most valuable asset and can work for them now that they are ready to retire.
What is a Reverse Mortgage
A reverse mortgage is a type of home loan that is precisely what its name indicates. How it works is, rather than making payments to a lender each month on the balance of your mortgage, the lender loans you money based on the equity in the house. The flow of the money is reversed compared to a traditional forward mortgage. You can then draw money to live on from the equity in your home. Often, borrowers have mortgages already on their home and perceive one of the benefits of the HECM is the payoff of their current mortgage, and extinguishing the need to make a mortgage payment ever again.
The most common type of reverse mortgage is the home equity conversion mortgage or HECM. If your home is not worth more than $679,650, then you will likely apply for a HECM. Other options are available for rare and specific circumstances.
The Federal Housing Administration (FHA), part of the Department of Housing and Urban Development (HUD), insures these HECM home loan packages for lenders. The lender will order an appraisal on your home to learn the market value and then determine how much of the equity they can let you borrow. They will not loan you the entire amount of your equity.
A typical reverse mortgage in Oregon and around the country will let you borrow about 60% of your equity after the lender takes their fees and insurance costs from the proceeds. Once the loan funds, you won’t make monthly payments to the lender.
Not every lender has the approval to handle HECM loans, but Strategic Mortgage Solutions is proud to help you with your reverse mortgage in Oregon, and some Loan Officers with over 17yrs experience in offering these loans.
How Does the Lender Distribute the Money?
Once you go through the entire loan process and close on the transaction, you will receive your funds. How does a reverse mortgage in regards to receiving funds? You generally have four main choices in how the lender distributes the money to you:
You can collect all of the loan proceeds at one time to use as you wish. This method can be a good option for big home improvement projects or medical costs. This payout method has a fixed interest rate. The other choices have variable rates.
Line of Credit
The lender makes the funds available to you as a line of credit that you borrow from as needed. You only pay interest on the money you use from the line of credit.
You receive equal monthly payments over a set period of time, such as ten years. As the borrower, you determine how long of a term you would like.
Equal Monthly Payments
The lender pays a set amount to you each month as long as the home remains your primary residence and as long as there are still funds available.
Although these are the primary ways the lender distributes funds from a reverse mortgage, occasionally, homeowners choose to take the funds in a combination of these methods, such as term payments with a line of credit.
How Do I Know If I Qualify for a Reverse Mortgage?
Many homeowners would jump at the chance to access that much cash from their property, but not just anyone can obtain a reverse mortgage. The FDA has very narrow guidelines for a borrower to qualify for a HECM:
- You must be at least 62 years old.
- You must own your home outright or have at least 50% equity in it.
- You must pay loan origination and mortgage insurance premium fees up front. These often come out of the loan proceeds.
- You must keep up insurance and property tax payments.
- You must keep the home in good shape with proper maintenance.
- You must go through a HUD-approved counseling session to be sure you fully understand how the reverse mortgage works. This session typically costs around $125.
Does the Lender Own My Home?
No. The lender who gives you a reverse mortgage does not own your home. You do. As long as you keep up with insurance payments, property taxes, and maintenance, you remain in agreement with your loan requirements. You are, however, using some of the equity in the home.
If you move out of the house or if you pass away, then the loan becomes due. You or your heirs may choose to pay off the loan and retain possession of the home, or the lender can sell the house and use the proceeds to pay off the mortgage. Any remaining profit goes to you or your heirs. If the loan is more than the property is worth, the lender cannot attach debt to you or your estate. They can only recoup funds up to the amount of the loan and nothing more.
IMPORTANT NOTE: If the borrower dies or moves out of the property, their spouse or other family members cannot stay in the house without paying off the loan. They generally would have a couple of months to make other arrangements.
How Do I Get a Reverse Mortgage in Oregon?
From application to appraisal to funding, we will make sure you know exactly what to expect. We can help answer that complicated question of, “how does a reverse mortgage work” and get you and your loved one set.
It’s an honor to serve you and to help you have the money you need for a graceful retirement. You have worked hard for years. Now let us work hard for you.