Mortgagerateslocal.com – If you are a homeowner in California who is 62 or older, you may have heard of reverse mortgages. A reverse mortgage is a type of loan that allows you to borrow against the equity in your home and receive tax-free income without having to make monthly payments.
A reverse mortgage is a special kind of home loan that lets you convert a portion of your home equity into cash. Unlike a traditional mortgage, you don’t have to repay the loan until you sell your home, move out, or pass away.
The amount you can borrow depends on several factors, such as your age, the value of your home, the interest rate, and the loan fees. Generally, the older you are, the more equity you have, and the lower the interest rate, the more money you can get.
Sounds too good to be true, right? Well, not exactly. Reverse mortgages California have pros and cons, and they are not for everyone. We will explain what reverse mortgages are, how they work, and what you need to consider before applying for one.
How does a reverse mortgage work?
When you take out a reverse mortgage, you can choose how to receive the money. You can get a lump sum, a line of credit, a monthly payment, or a combination of these options. The money you receive is generally tax-free and does not affect your Social Security or Medicare benefits.
However, it may affect your eligibility for other public assistance programs, such as Medicaid. You should consult with a financial advisor before applying for a reverse mortgage. The interest and fees on your reverse mortgage will accrue over time and reduce your home equity.
This means that the amount you owe will increase and the amount you can leave to your heirs will decrease. However, you will never owe more than the value of your home, even if the loan balance exceeds it.
This is because reverse mortgages are non-recourse loans, which means that the lender cannot go after your other assets or income to recover the debt. The loan will be repaid when you sell your home, move out, or pass away. At that point, you or your heirs can either pay off the loan balance or let the lender sell the home and keep the proceeds.
Types of reverse mortgages in California
As we mentioned earlier, there are two main types of reverse mortgages in California: federally insured reverse mortgages and proprietary reverse mortgages. Let’s take a closer look at each type and how they differ.
Federally Insured Reverse Mortgages
Federally insured reverse mortgages in Californiaare also known as Home Equity Conversion Mortgages (HECMs). They are backed by the Federal Housing Administration (FHA), which guarantees that you will receive the agreed-upon payments and that you will never owe more than the value of your home.
HECMs are the most popular and widely available type of reverse mortgages in the U.S. To qualify for a HECM, you must meet the following criteria:
- You must be 62 or older
- You must own your home outright or have a low mortgage balance that can be paid off with the loan proceeds
- You must live in your home as your primary residence
- You must have sufficient income and credit to pay for property taxes, homeowners insurance, and maintenance
- You must receive counseling from a HUD-approved reverse mortgage counselor
The amount you can borrow with a HECM depends on several factors, such as your age, the value of your home, the interest rate, and the loan fees. The maximum loan limit for a HECM is $822,375 in 2021. However, this does not mean that you will get the full amount.
The FHA uses a formula called the principal limit factor (PLF) to determine how much of your home equity you can access. The PLF varies depending on your age, the interest rate, and the expected average mortgage interest rate (EAMI).
Generally, the older you are, the lower the interest rate, and the higher the EAMI, the higher the PLF and the more money you can get. You can choose how to receive the money from a HECM. You have four options:
- Lump sum: You get the entire loan amount in one payment at closing. This option is only available with a fixed interest rate.
- Line of credit: You get a credit line that you can access as needed. The unused portion of the credit line grows over time at the same rate as the loan interest. This option is only available with an adjustable interest rate.
- Monthly payment: You get a fixed monthly payment for as long as you live in the home (tenure) or for a specified period of time (term). This option is available with either a fixed or an adjustable interest rate.
- Combination: You get a combination of any of the above options. For example, you can get a lump sum at closing and a line of credit for future use, or a monthly payment and a line of credit.
The interest and fees on a HECM will accrue over time and reduce your home equity. The interest rate can be either fixed or adjustable, depending on the payment option you choose.
The fees include an upfront mortgage insurance premium (MIP) of 2% of the home value or the loan limit, whichever is less, and an annual MIP of 0.5% of the loan balance. The fees also include an origination fee of up to $6,000, depending on the loan amount, and other closing costs, such as appraisal, title, and escrow fees. You can pay these fees with the loan proceeds or out of pocket.
A HECM is a non-recourse loan, which means that you will never owe more than the value of your home, even if the loan balance exceeds it. The loan will be repaid when you sell your home, move out, or pass away. At that point, you or your heirs can either pay off the loan balance or let the lender sell the home and keep the proceeds.
Proprietary Reverse Mortgages
Proprietary reverse mortgages are also known as jumbo reverse mortgages or private reverse mortgages in California. They are offered by private companies and are not insured or regulated by the FHA.
Proprietary reverse mortgages are designed for homeowners who have high-value homes that exceed the HECM loan limit of $822,375. They may also have more flexible eligibility and payment options than HECMs. To qualify for a proprietary reverse mortgage, you must meet the following criteria:
- You must be 60 or older (some lenders may require a higher age)
- You must own your home outright or have a low mortgage balance that can be paid off with the loan proceeds
- You must live in your home as your primary residence
- You must have sufficient income and credit to pay for property taxes, homeowners insurance, and maintenance
- You must receive counseling from a HUD-approved or lender-approved reverse mortgage counselor
The amount you can borrow with a proprietary reverse mortgage depends on the lender and the product. Some lenders may offer loan amounts up to $4 million or more, depending on the value of your home and your age.
However, the loan-to-value ratio (LTV) may be lower than a HECM, meaning that you may not be able to access as much of your home equity as you would with a HECM. The LTV varies depending on the lender, the product, your age, and the interest rate.
You can choose how to receive the money from a proprietary reverse mortgage. You may have more options than a HECM, such as:
- Lump sum: You get the entire loan amount in one payment at closing. This option may be available with either a fixed or an adjustable interest rate.
- Line of credit: You get a credit line that you can access as needed. The unused portion of the credit line may or may not grow over time, depending on the product. This option may be available with either a fixed or an adjustable interest rate.
- Monthly payment: You get a fixed monthly payment for as long as you live in the home (tenure) or for a specified period of time (term). This option may be available with either a fixed or an adjustable interest rate.
- Combination: You get a combination of any of the above options. For example, you can get a lump sum at closing and a line of credit for future use, or a monthly payment and a line of credit.
- Modified term: You get a line of credit and a monthly payment for a specified period of time. This option may be available with an adjustable interest rate.
- Modified tenure: You get a line of credit and a monthly payment for as long as you live in the home. This option may be available with an adjustable interest rate.
The interest and fees on a proprietary reverse mortgage will accrue over time and reduce your home equity. The interest rate can be either fixed or adjustable, depending on the payment option you choose.
The fees vary depending on the lender and the product, but they may include an origination fee, a servicing fee, and other closing costs, such as appraisal, title, and escrow fees. You can pay these fees with the loan proceeds or out of pocket.
A proprietary reverse mortgage may or may not be a non-recourse loan, depending on the lender and the product. Some lenders may offer a non-recourse feature, which means that you will never owe more than the value of your home, even if the loan balance exceeds it.
Other lenders may not offer this feature, which means that you or your heirs may be liable for the difference between the loan balance and the home value. The loan will be repaid when you sell your home, move out, or pass away. At that point, you or your heirs can either pay off the loan balance or let the lender sell the home and keep the proceeds.
Reverse Mortgages in California Pros and Cons
Reverse mortgages in California have both advantages and disadvantages, depending on your situation and goals. Here are some of the main pros and cons to consider:
Pros
- You can access the equity in your home without having to sell it or make monthly payments
- You can use the money for any purpose, such as supplementing your retirement income, paying for medical expenses, or making home improvements
- You can stay in your home as long as you want and maintain the title and ownership
- You can choose how to receive the money and how to spend it
- You can benefit from potential appreciation in your home value over time
- You can protect yourself from the risk of outliving your savings or facing unexpected expenses
- You can enjoy peace of mind and financial independence in your golden years
Cons
- You will reduce your home equity and the inheritance you can leave to your heirs
- You will incur interest and fees that will increase your loan balance over time
- You will have to pay for property taxes, homeowners insurance, and maintenance, or risk losing your home
- You will have to meet the eligibility and ongoing requirements of the loan, or risk defaulting
- You may lose some of your public benefits, such as Medicaid, if your income or assets exceed the limits
- You may face difficulties if you want to move out, sell your home, or refinance your loan
- You may fall victim to scams or predatory lenders who charge high fees or offer unsuitable products
Best Reverse Mortgage Lenders in California
We have selected the following five lenders as the best reverse mortgage lenders in California. We have considered their reputation, product range, customer service, fees, and reviews to make our recommendations. However, you should always compare multiple offers and shop around for the best deal that suits your needs and goals.
1. American Advisors Group (AAG)
AAG is the largest reverse mortgage lender in the U.S. and has been in business since 2004. It offers HECM, jumbo, and reverse for purchase loans, as well as a lump sum, line of credit, or monthly payment options.
AAG is known for its excellent customer service and has an A- rating from the BBB and a 4.6-star rating from Trustpilot. AAG also provides free educational materials and tools, such as a reverse mortgage calculator, a retirement guide, and a DVD kit.
2. Finance of America Reverse (FAR)
FAR is a division of Finance of America Mortgage, a leading mortgage lender in the U.S. It offers HECM, jumbo, and reverse for purchase loans, as well as two unique products: EquityAvail and HomeSafe. EquityAvail is a hybrid reverse mortgage that requires borrowers to make payments for the first 10 years.
While HomeSafe is a proprietary reverse mortgage that allows borrowers to access more equity than a HECM. FAR has an A+ rating from the BBB and a 4.4-star rating from Trustpilot. FAR also offers a free e-book and a video series on reverse mortgages California.
3. Longbridge Financial
Longbridge Financial is a relatively new player in the reverse mortgage industry, founded in 2012. It offers HECM, jumbo, and reverse for purchase loans, as well as a Platinum product that has lower fees and higher loan limits than a HECM.
Longbridge Financial has an A+ rating from the BBB and a 3.9-star rating from Trustpilot. Longbridge Financial also has a mobile app that allows borrowers to access their loan information and make payments.
4. Open Mortgage
Open Mortgage is a full-service mortgage lender that offers reverse mortgages California as one of its products. It offers HECM, jumbo, and reverse for purchase loans, as well as a lump sum, line of credit, or monthly payment options.
Open Mortgage has an A+ rating from the BBB and a 2.7-star rating from Trustpilot. Open Mortgage also has a blog and a podcast that cover various topics related to reverse mortgages and retirement planning.
5. Liberty Reverse Mortgage
Liberty Reverse Mortgage is a subsidiary of Ocwen Financial Corporation, a leading mortgage servicer in the U.S. It offers HECM, jumbo, and reverse for purchase loans, as well as a lump sum, line of credit, or monthly payment options. Liberty Reverse Mortgage has an A+ rating from the BBB and a 4.8-star rating from Trustpilot. Liberty Reverse Mortgage also provides free consultations and a reverse mortgage guide.
Conclusion
Reverse mortgages are a complex and important financial decision that can have a significant impact on your life and your legacy. They can be a great option for some seniors who want to access the equity in their home and enjoy a comfortable and secure retirement.
However, they also have risks and drawbacks that you need to understand and weigh carefully. Before you apply for a reverse mortgage, you should do your homework, consult with a professional, and shop around for the best lender and product. Remember, a reverse mortgage is not a one-size-fits-all solution, and it may not be the best option for you.
