A reverse mortgage is a financial agreement where seniors can borrow money against the equity of their homes. Applicants can receive the loan amount from the lender in a lump sum or monthly payments. However, one must be 62 years or above and own the house to avail of this facility. This guide takes a closer look at reverse mortgages, their types, and a few things to know while applying.

What is a reverse mortgage?
A reverse mortgage is a loan facility that allows senior citizens to borrow money against the value of their house. They can continue to stay in the property and use the amount received to meet their expenses. Unlike a traditional loan, applicants do not have to repay in monthly installments. Instead, the entire amount becomes due when they move out, sell the house, or pass away.

What are the types of reverse mortgage?
The three main types are:

Home Equity Conversion Mortgages (HCEMs)
HCEMs are the most common type. The Department of Housing and Urban Development (HUD) insures HCEMs, assuring the lender they will get their money if the borrower fails to repay. Moreover, HCEMs have no restrictions on how to spend the money.

Single-purpose reverse mortgages
These are the cheapest options offered by state or local government agencies. As the name implies, one can use the loan only for the purpose specified by the lender. It is ideal for homeowners with modest incomes who need money to pay taxes for home improvement or repairs.

Proprietary (private) reverse mortgages
Private moneylenders offer these at high-interest rates, making it risky. If one does not repay on time, the lender could increase the loan, use up the applicant’s equity, and cause them to lose their property.

What to keep in mind when applying?
When applying for a reverse mortgage, one should research the policy well and read the terms and conditions. Here are a few things to keep in mind:

The interest rates vary
The total amount to be repaid will include the borrowed money, interest, and fees. Market fluctuations determine the interest rates for reverse mortgages, which can change without notice. The interest rates are calculated daily and added to the loan. Currently, the lowest fixed interest rate is around 6.680% and the lowest adjustable rate is around 6.280%

There is an eligibility criterion
Like every financial policy, a reverse mortgage has eligibility criteria. To qualify, one should be 62 years and the house’s primary owner. The house must also be their primary residence, and they should have paid most of their mortgage.

HUD-backed mortgages are safer
Reverse mortgages backed, insured, or guaranteed by federal or state agencies like the HUD carry less risk and lesser interest. It helps seniors avoid expensive loans and financial fraud.

Applicants can continue to stay in the house
One can continue to maintain the house and pay all the taxes and insurance associated with the property even after securing a mortgage.

Defaulters may have to repay sooner
If one fails to pay the taxes and insurance on time, maintain the home well, or comply with the reverse mortgage terms, the loan will default. Consequently, the applicant may have to repay the mortgage sooner.

Individuals must consult an expert before applying for a reverse mortgage to understand the costs, financial implications, and alternative finance methods.