by First Integrity Team Supreme Lending | Feb 10, 2025
A reverse mortgage* is a unique loan designed to help eligible homeowners and homebuyers aged 62 or older convert some of their home equity into cash. This program may offer greater flexibility and financial independence, especially for those entering retirement. Reverse mortgages allow qualified senior homeowners to tap into their home’s value to meet other financial needs without having to sell their property or make monthly mortgage payments. What is a reverse mortgage, how does it work, and who may benefit from one? Here’s a breakdown.
What Is a Reverse Mortgage?
Reverse mortgages allow homeowners to borrow money using their home as security for the loan. Unlike traditional home loans where the borrower makes monthly payments to the lender, with a reverse mortgage, the lender makes payments to the homeowner. Reverse mortgages are experiencing a surge in popularity as more retirees may be considering them to supplement their retirement income.
How It Works?
The funds received with a reverse mortgage are based on the equity that’s been built in the home. Payments can be made to the homeowner in several ways:
- A lump sum
- A line of credit
- Fixed monthly payments
- A combination of all three options outlined above
The loan does not have to be repaid until the borrower sells or no longer lives in the home. However, the borrower must still meet all loan obligations including living in the house as a primary residence, keeping up with all property payments such as insurance and taxes, and maintaining the home’s condition.
What Can Reverse Mortgage Funds Be Used For?
A reverse mortgage may be a way for seniors to turn their home’s equity into cash to meet their financial needs while maintaining ownership of the property. The funds may serve various purposes, such as paying off other existing mortgages; covering healthcare, taxes, or insurance expenses; funding home renovations; and serving as a safety net for unexpected emergencies.
It may be an ideal option for seniors who:
- Want to stay in their home long-term.
- Need additional income to maintain their quality of life during retirement.
- Have significant equity built in their property but don’t want to sell or cash-out refinance** and take on monthly mortgage payments.
- Need to pay for in-house healthcare.
- Get a later in life silver divorce but want to stay in their home.
- Want to buy a home but are unable to pay all cash.
Frequently Asked Questions About Reverse Mortgage
1. Do I still own my home with a reverse mortgage?
Yes. When you obtain a reverse mortgage, you still retain ownership of your home. Your name remains on the title and the home is yours—just as it would be with any mortgage. You’re still responsible for paying property taxes, homeowners insurance, and maintaining the home.
2. When does the mortgage need to be repaid?
Once you no longer live in the home as your primary residence, the loan balance, including interest and fees, must be repaid. This is usually done by the homeowner or their estate that is selling the house
3. Will I owe more than my home is worth or leave my heirs with debt?
No. A HECM (Home Equity Conversion Mortgage) reverse mortgage is insured by the Federal Housing Administration. This insurance feature guarantees that you will never owe more than the value of your home when the loan becomes due. No debt will be left to your heirs. And if the loan balance is less than the market value of the home, the additional equity is retained by the homeowner or heirs if the home is sold.
4. What types of homes qualify for a reverse mortgage?
Single-family homes, FHA-approved condos, and multi-family homes (up to four units) are typically eligible, as long as the property is the borrower’s primary residence.
*A reverse mortgage increases the principal mortgage loan amount and decreases home equity (it is a negative amortization loan). When the loan is due and payable, some or all of the equity in the property no longer belongs to borrowers, who may need to sell the home or otherwise repay the loan with interest from other proceeds. Lender charges an origination fee, closing costs and servicing fees (added to the balance of the loan). Monthly service fees are not assessed in Texas. The balance of the loan grows over time and Lender charges interest on the balance. The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, hazard insurance. The borrower must maintain the home according to FHA requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure. This material has not been reviewed, approved or issued by HUD, FHA or any government agency. The company is not affiliated with or acting on behalf of or at the direction of HUD/FHA or any other government agency
**By refinancing an existing loan, total finance charges may be higher over the life of the loan.
by First Integrity Team Supreme Lending | Aug 20, 2024
When homeowners think about tapping into the equity they’ve built in their property, a Home Equity Line of Credit, also known as a HELOC, may come to mind. This alterative transaction mortgage can be incredibly versatile and useful for eligible homeowners to access funds. However, it’s important to understand exactly what a HELOC is and how it works when deciding if it’s the right option for you. Let’s explore how you may benefit from using a Home Equity Line of Credit.
What Is a HELOC?
A Home Equity Line of Credit (HELOC) allows homeowners to borrow against the equity in their home, essentially turning part of their home’s value into cash. Unlike a traditional home loan, a HELOC functions similar to a credit card. Homeowners can borrow, repay, and borrow again up to a maximum credit limit. A HELOC is meant to use toward large expenses such as home renovations, tuition, or paying down other debts with higher interest.
How Does a HELOC Work?
A HELOC has a designated draw period, which is the time during which you can borrow money. This period is typically the first 10 years of a 30-year term. During this time, you’re only required to make interest payments on the amount you borrowed, which is significantly less than other loan types. Although, you may be able to pay down your principal with no penalty, which can result in lowering your minimum monthly payment.
After the draw period ends, the repayment period begins. This is when you can no longer draw money out and need to start paying back both the principal and interest of the loan. This new minimum payment will ensure the balance is paid in full by the maturity date. Interest rates on HELOCs are variable, meaning they change over time due to market conditions and set margins. As a result, the monthly payments can fluctuate.
Who Might Consider a HELOC?
HELOCs are a flexible financing option that may be attractive for homeowners who need access to funds for various reasons, including:
- Home Improvements. If you’re planning to remodel your kitchen, add an extension, or make other home renovation projects, a HELOC could provide the necessary funds.
- Pay Off High-Interest Debt. HELOCs often have lower interest rates than credit cards or personal loans, which makes them a good option to pay off other debts.
- Education Expenses. If you or your children need assistance paying for tuition, a HELOC may provide a helpful solution.
- Unexpected Expenses. A HELOC can also serve as a financial safety net for unseen expenses, such as medical bills or emergency repairs.
Supreme Lending HELOC Options
Did you know that Supreme Lending offers different types of HELOC programs? In addition to a standard HELOC, there is also a program specifically designed for home renovations, which uses the home value after improvements. There is also an option to tap into a line of credit on current investment properties.
HELOC Pros and Cons
Pros:
- Flexibility. You can borrow as much or as little as you need up to your limit during the draw period.
- Interest-Only Payments. During the draw period, borrowers have the option to only pay interest, which results in lower monthly payments compared to traditional loans.
- Potentially Lower Rates. HELOCs typically have lower interest rates than credit cards and personal loans, offering affordability.
Cons:
- Variable Rates. HELOCs have variable interest rates, which means they can change. If rates increase, so will the monthly payments.
- Risk of Foreclosure. When using a HELOC, you’re using your home as collateral. Therefore, if you default on the payments, you could risk losing your home.
- Potentially Overspend. Easy access to credit and funds may lead to overspending, which could put the home at risk.
HELOC vs. Cash-Out Refinance: What Is the Difference?
A cash-out refinance* is another way to tap into your home’s equity, but it works differently from a line of credit. With cash-out refi loans, you replace your existing mortgage with a new one for more than you currently owe. In turn, you receive the difference in cash. Explore when you may want to choose a HELOC or a cash-out refinance.
Key Differences
- Loan Structure. A HELOC is a revolving line of credit, while a cash-out refinance is a one-time lump sum.
- Interest Rates. Refinancing can offer fixed interest rates to maintain predictable, stable monthly payments. Unlike a HELOC, which involves variable rates.
When to Choose One Over the Other?
- HELOC. You may consider a home equity line of credit if you have ongoing expenses or projects that don’t need all the funds at once. For example, home renovations, you can use the funds on an as-needed basis.
- Cash-Out Refinance. This is best if you prefer a fixed-rate and want a large sum of money upfront instead of opening a line a credit.
Frequently Asked Questions
How much can I borrow with a HELOC?
The amount you can borrow depends on your home’s value, the amount you owe on your current mortgage, your credit score, and the program’s guidelines. Typically, you can borrow up to 85% of your home’s equity if you qualify.
Are there fees associated with it?
Yes! Similar to closing costs with traditional mortgages, there may be fees for a HELOC such as an application fee, appraisal cost, and potential annual fees.
Can I pay off a HELOC early?
Yes, most HELOCs allow for early repayment with no penalty costs. Be sure to confirm the details with your loan officer.
How does a HELOC affect my credit score?
A HELOC can impact your credit score depending on how you manage the credit line. Timely payments may boost your score, while missed payments can harm it.
Is it tax deductible?
Interest on HELOC loans may be tax deductible. Please consult with your tax professional for more details.
What happens if I sell my home?
If you have a HELOC and then sell your home, you’ll need to pay it off in full. You could use the proceeds of the sale toward the HELOC.
Ready to Unlock Your Home Equity Line of Credit?
A HELOC may be a strategic financial tool for homeowners needing to access funds. Whether you’re paying for home renovation projects, education, or other significant expenses, a line of credit offers flexibility when you need it. However, it’s crucial to weigh the pros and cons, understand potential risks, and compare your options.
Want to learn more about HELOCs or other mortgage services? Contact your local Supreme Lending branch. We’re ready to help!
*By refinancing an existing loan, total finance charges may be higher over the life of the loan.
