You have probably heard that a reverse mortgage is a home loan designed specifically to provide you with an extra income when you retire.
If you are preparing to retire or already retired, you may struggle with the idea of losing a large amount of your income. Before you consider applying for one, you need to understand how the process works. Part of that process is understanding the language surrounding reverse mortgage agreements. Here is what you need to know about common reverse mortgage definitions.
What the “Reverse” in “Reverse Mortgage” Really Means
If you are wondering where the term “reverse mortgage” comes from, it relates to the methods of payment for the loan. When you apply for a regular mortgage against the value of the home, you borrow a large amount at once, generally. Then you must start paying back what you borrow almost immediately in small installments. Taking out a reverse mortgage allows you to receive installment payments from your lender on an ongoing basis, instead, if you so choose.
Under the terms of reverse mortgage, the total borrowed is not owed back as long as you keep living in your home. Therefore, you can be paid a set amount each month for a long time with no repayment requirement. Although, you can only borrow up to a certain total amount determined when you initially apply for the loan. That is why such a mortgage is considered “reverse.”
Where a “Home Equity Line of Credit” Comes In
The title “reverse mortgage” can often be particularly confusing when the loan terms are altered. There is no rule stating you must borrow small amounts each month. You can set other loan terms. For example, it may make more sense to withdraw a large amount right away if you are trying to pay an unexpected medical expense during retirement. Alternatively, you may prefer a home equity line of credit.
Requesting a home equity line of credit is a bit like applying for a credit card. If your request is approved, you are given a total amount of money you can borrow. That amount is a calculated percentage of your home equity. Then you can borrow money using the home equity line of credit up to that total amount on an as needed basis, rather than receiving specific amounts at predetermined times.
How the Abbreviation “HECM” Relates to Reverse Mortgages
You may hear the abbreviation “HECM” a lot when exploring reverse loans possibilities. It stands for “home equity conversion mortgage.” There is no major difference between a reverse mortgage and an HECM except for the reverse mortgage lender from which you receive the loan. A private reverse mortgage lender, such as your local bank, is more likely to use the simple terminology. A lender affiliated with the government will call it an HECM. Both types of loans are subject to government loan regulations, but only HECMs are insured by government agencies.
How the Term “Home Equity” Relates to Reverse Mortgages
When you think of “Home Equity,” you probably think of the value of your home. That is correct, but home equity is not always easy to define. A reverse mortgage calculator is needed to determine your exact home equity. That calculation will be based on the age of your home, the condition it is in and market values in the area.
Additionally, a reverse mortgage calculator is required because the government has placed regulations on reverse loan terms. Whether you are getting a government-sponsored HECM or a reverse mortgage from a private lender, a cap will be placed on the percentage you can borrow. Your lender can advise you about the total you can borrow based on current regulations and calculations. The regulations can change occasionally, so you should not rely on estimates based on past rates.