What is the difference between a reverse mortgage and a second mortgage? (2024)

What is the difference between a reverse mortgage and a second mortgage?

Home equity loans, also known as “second mortgages,” are loans against the equity in your home. You make payments monthly over a set time period, typically from five to 30 years. A reverse mortgage is also a loan against your equity, but you don't make monthly payments.

What is the downside to a second mortgage?

You could lose your home if you don't pay back a second mortgage. Interest rates can be higher than refinancing. You might not qualify if you don't have enough equity or appraisal value. Second mortgages can be costly with appraisal fees, credit checks and closing costs.

Is it better to take a home equity loan or a reverse mortgage?

Even if you don't get as much money from a home equity loan as you would with a reverse mortgage, they're a much safer option. They set up immediate monthly payments and don't include the danger of rapidly increasing debt. That alone makes them a better choice for most people.

What is the major disadvantage of reverse mortgage?

A reverse mortgage isn't free money: The borrowing costs can be high, and you'll still need to pay for homeowners insurance and property taxes. Reverse mortgages can also complicate life for your heirs, especially if they don't want the home or the home's value isn't enough to cover what's owed.

What types of homes do not qualify for a reverse mortgage?

Most reverse mortgages are taken out on single family, one-unit homes. Most programs also accept two-to-four unit buildings in which one unit is owner occupied by the borrower, condominiums and manufactured homes built after June 1976. Mobile homes and cooperatives are generally not eligible for a reverse mortgage.

How much does a second mortgage cost?

You receive funds in a lump sum and pay the balance in even installments over terms ranging between five and 30 years. You'll typically pay closing costs equal to 2% to 5% of your second loan amount and can use the cash to buy or refinance a home.

Why would someone take a second mortgage?

Taking out a second mortgage means you can access a large amount of cash using your home as collateral. These loans often come with low interest rates, plus a tax benefit. You can use a second mortgage to finance home improvements, pay for higher education costs, or consolidate debt.

Why do banks not recommend reverse mortgages?

While a reverse mortgage lets you access your equity without selling your house right away, it can be financially risky: A reverse mortgage increases your debt and can use up your equity. While the amount is based on your equity, you're still borrowing the money and paying the lender a fee and interest.

Who benefits most from a reverse mortgage?

The reverse mortgage is most suitable for homeowners looking to remain in their home but see a need or benefit of having additional funds available. They do not want to have the burden of monthly mortgage payments in their monthly budget.

What happens if you outlive your reverse mortgage?

A reverse mortgage is repaid when the last borrower (or even the last eligible non-borrowing spouse) leaves the house or passes away. Typically, the home is sold and the proceeds from the sale are used to pay back the loan. The heirs will receive any remaining equity.

Why are so many people disappointed by reverse mortgages?

Potential Reverse Mortgage Borrowers Are Often Disappointed

Like it or not, there are actually multiple reasons that you can borrow less than you might think: Home Ownership: When you get a reverse mortgage you still own your home. Home ownership means that you need to retain at least some of your home equity stake.

What Suze Orman says about reverse mortgages?

Taking a loan too early

The earliest a homeowner is eligible to take out a reverse mortgage is age 62, but Orman considers it risky to do so. "If you tap all your home equity through a reverse at 62 and then at 72 you realize you can't really afford the home, you will have to sell the home," she said.

Does AARP recommend reverse mortgages?

AARP does not recommend for or against reverse mortgages. They do, however, recommend that borrowers take the time to become educated so that borrowers are doing what is suitable for their circ*mstances.

What is the 60% rule for reverse mortgage?

Called the initial principal limit, you can only withdraw 60 percent of your available equity during the first 12 months, with the remaining equity becoming available after the first 12 months. The only exception is if your mandatory obligations exceed 60 percent of your available equity.

Can you lose your house with a reverse mortgage?

Just like a traditional mortgage, with a HECM you are borrowing money and using your home as security for the loan. You must continue to pay for property taxes, homeowner's insurance, and make repairs needed to maintain your home or the lender can foreclose on the home.

Does the bank own your house after a reverse mortgage?

A reverse mortgage allows borrowers to access a portion of their equity in the home and convert it to cash. It's a loan with some unique attributes, but the bank does not own the home.

Are 2nd mortgages a good idea?

A second mortgage can be a good option to access extra money that you can put back into your home. Interest on second mortgages can also be tax-deductible in some cases when used for home improvements.

How is a $50000 home equity loan different from a $50000 home equity line of credit?

While a home equity loan would give you $50,000 upfront in the above example, a HELOC would give you access to a $50,000 line of credit. You might never borrow the full $50,000, and you'll only pay interest on the amounts you actually borrow.

Do you need an appraisal for a second mortgage?

You might also need to get an appraisal to confirm the current value of your home. Qualifications for second mortgages vary, but many lenders prefer that you have at least 15 percent to 20 percent equity in your home. You can typically borrow up to 85 percent of your home's value, minus your current mortgage debts.

Can a house be sold with a second mortgage?

Now you want to sell your house, but you're wondering if that's possible when you're carrying two home loans. The answer is yes, but think twice before you put up that "for sale" sign. As you weigh selling your home, keep the following information about your second mortgage in mind.

What are the rules for getting a second mortgage?

Lenders usually require an income verification, credit check, and home appraisal to determine whether or not a borrower qualifies for a second mortgage. Homeowners can usually borrow up to 85% of their home's current value, minus their first mortgage balance.

How can I get equity out of my house without refinancing?

Yes, there are options other than refinancing to get equity out of your home. These include home equity loans, home equity lines of credit (HELOCs), reverse mortgages, sale-leaseback agreements, and Home Equity Investments.

How much money do you actually get from a reverse mortgage?

Generally speaking, you can usually get somewhere between 40% to 60% of your home's appraised value. And the higher your home value is, the more money you can potentially access.

How long do heirs have to pay off a reverse mortgage?

Once a reverse mortgage homeowner dies, the lender sends a letter to the heirs explaining that the loan is due. Beneficiaries then have 30 days to figure out how they want to proceed. That's why lenders suggest finalizing a strategy in advance. Lenders typically give heirs six months to complete the transaction.

What are the 3 types of reverse mortgages?

There are several kinds of reverse mortgage loans: (1) those insured by the Federal Housing Administration (FHA); (2) proprietary reverse mortgage loans that are not FHA-insured; and (3) single-purpose reverse mortgage loans offered by state and local governments.