Due to the costs associated with the housing market, most homeowners will need to take out a mortgage to pay for their house. A reverse mortgage is a type of loan in which a borrower receives payment from a lender to put towards their mortgage, rather than making mortgage payments to a financial institution. Loan repayment is due in full when the borrower no longer uses the home as their primary residence, sells the property, or dies.
In order to refinance homeowners need to meet certain eligibility criteria established by the lender. Criteria will also vary by what type of reverse mortgage the homeowner is using. The more common option is a Home Equity Conversion Mortgage (HECM), which is issued by an FHA-approved lender. The alternative is proprietary reverse mortgage, which is done through a private lender without federal backing.
To qualify for an HECM the borrower must be 62 or older, the home must be their primary residence, not be delinquent on federal debt, own the property or have enough equity to pay off the loan, and keep up to date on other charges towards the property (ex- homeowner’s insurance, property taxes). They are also required to attend consumer counseling with an HECM counselor approved by the Department of Housing and Urban Development. As of January of 2019 the maximum amount for an HECM is $726,525.
The terms of a proprietary reverse mortgage are much more open ended than an HECM because it’s conducted through private companies who select their own lenders. These are sometimes called ‘jumbo reverse mortgages’ because there is no maximum, only however much risk the borrower is willing to assume; hypothetically speaking a lender could receive millions through this option. While they have similar criteria, a proprietary reverse mortgage is far less common simply because there are not many borrowers in need of such a high amount.
There are two ways in which a reverse mortgage can be refinanced. One is to refinance into a conventional mortgage. This option is better for those who no longer need the loan and are ready to pay it off, or those who want to leave the home as inheritance. This option doesn’t have federal backing, but some can be guaranteed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac).
The second option is to use another reverse mortgage. But allows you to take advantage of your home’s equity with lower interest rates. Another reverse mortgage also works if the home has appreciated since the first loan was taken out. Refinancing means cashing out the new equity.
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