Home Equity Loan (HELOC)
Although there are different types of reverse mortgages, all of them are similar in certain ways. Here are the features that most have in common.
With a reverse mortgage, you remain the owner of your home just like when you had a forward mortgage. You are still responsible for paying your property taxes and home-owner insurance and for making property repairs.
- When the loan is over, you or your heirs must repay all of your cash advances plus interest. Reputable lenders don’t want your house; they want repayment.
You can use the money you get from a reverse mortgage to pay the various fees that are charged on the loan. This is called “financing” the loan costs. The costs are added to your loan balance, and you pay them back plus interest when the loan is over.
The amount of money you can get depends most on the specific reverse mortgage plan or program you select. It also depends on the kind of cash advances you choose. Some reverse mortgages cost a lot more than others, and this reduces the amount of cash you can get from them.
Within each loan program, the amounts you can get generally depend on your age and your home’s value:
- The older you are, the more cash you can get; and
- The more your home is worth, the more cash you can get.
The specific dollar amount available to you may also depend on interest rates and closing costs on home loans in your area.
Reverse mortgages generally must be “first” mortgages, that is, they must be the primary debt against your home. So if you now owe any money on your property, you generally must either:
- pay off the old debt before you get a reverse mortgage; or
- pay off the old debt with the money you get from a reverse mortgage.
Most reverse mortgage borrowers pay off any home debt with a lump sum advance from their reverse mortgage. You may not have to pay off other debt against your home if the prior lender agrees to be repaid after the reverse mortgage is repaid. Generally only state or local government lending agencies are willing to consider “subordinating” their loans in this way.
The debt you owe on a reverse mortgage equals all the loan advances you receive (including any you used to finance the loan or to pay off prior debt), plus all the interest that is added to your loan balance. If that amount is less than your home is worth when you pay back the loan, then you (or your estate) keep whatever amount is left over.
But if your rising loan balance ever grows to equal the value of your home, then your total debt is generally limited by the value of your home. Put another way, you generally cannot owe more than what your home is worth at the time the loan is repaid.