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Securing an Alabama Reverse Mortgage

If you’re considering taking out an Alabama reverse mortgage to secure a new source of income for your retirement, you’re not alone. Reverse mortgages are used by thousands of seniors to access home equity and apply the wealth that they’ve built over the years to significant expenses.

What is a reverse mortgage?

A reverse mortgage is the opposite of a traditional mortgage, in which borrowers pay lenders in order to build equity in their home. Lenders pay funds to the reverse mortgage homeowner via a lump sum or in payments of a set amount over time. 

How can reverse mortgage funds be used?

You can use reverse mortgage funds as retirement income or to pay for living expenses. These mortgages transform your home equity into cash that you can spend on medical expenses, home improvements, vacations, bills, and other obligations. You can use the funds to pay off other debts and even other mortgages if necessary.

What types of reverse mortgages exist?

Reverse mortgages have three forms:

  • Goverment-insured: FHA HECM (Home Equity Conversion Mortgage).
  • Single-purpose: backed by nonprofits or state or local government agencies. 
  • Proprietary: backed by private entities.

The most common source is the FHA HECM reverse mortgage, which is insured by the Department of Housing and Urban Development (HUD). This article will focus on HECM reverse mortgages.

Who can get a reverse mortgage?

Homeowners aged 62 and older who own their home outright and have most of their mortgage paid off. If the current mortgage is not paid off, the initial reverse funds or some combination with out-of-pocket cash must be used to deplete the remaining balance. Credit history is not a qualifying factor. 

What costs are associated with a reverse mortgage?

There are several costs associated with securing an HECM reverse mortgage in Alabama, including but not limited to:

  • Upfront fees: include the lender's fees, and can be paid from the reverse mortgage funds. This means, however, that the money taken cannot be borrowed back. So a $200,000 reverse mortgage with $16,000 in fees paid via the reverse mortgage funds will leave the homeowner with $184,000. 
  • Closing fees: include all the same fees required of a traditional mortgage closing. 
  • Reverse mortgage counseling fees: HUD mandates all reverse mortgage homeowners attend reverse mortgage counseling. Fees are in the $100 range but can be waived for lower income seniors. 
  • Mortgage insurance: an upfront mortgage insurance premium (MIP) must be paid for reverse mortgage borrowers. It can be as low as 0.5% and as high as 2.5% of the appraised home value, unless the home is over $625,500, in which case the upfront mortgage insurance is calculated by the lender. 

How will I receive my funds, and for how long?

The funds received through a reverse mortgage can be delivered in several ways:

  • Monthly payments provided on a specified date each month.
  • As a credit line, available to fund purchases as needed.
  • As a lump sum for the full amount of the equity.
  • Any combination or variation of the above options.

The lender will continue to provide money through the homeowner's preferred method until the equity in the home has been entirely depleted. If and when reverse mortgage home equity is depleted, the homeowner can continue living in the home until the event they pass away. The lender cannot take possession of the home, even once equity runs out.

Does the equity need to be repaid?

The equity need not be repaid unless the reverse mortgage homeowner moves, sells the home, or passes away. If the homeowner passes away, ownership of the home and the reverse mortgage debt will pass to any heirs, who can then sell the home to pay off the debt.

Federal regulations ensure that lenders cannot collect more money beyond what the home is worth, which means heirs will not be obligated to repay any money than the home value. 

Alabama Reverse Mortgage Lenders

As with any mortgage program, you must take the time to find the right lender to close your reverse mortgage loan. In Alabama, there are many lenders who specialize in working on these loans.  Any one of these lenders will be willing to provide you with advice and assistance.

Make sure you compare mortgage rates offered by multiple lenders. If you contact only one lender, he or she may quote you a rate that’s above the average market rate  You’ll lose more of your home equity with a higher rate. Find the lender who offers the lowest rate on a reverse mortgage.

The most important financial consideration to evaluate when selecting a lender for your reverse mortgage is the cost of closing the loan. Lenders charge origination fees and other expenses to the seniors they work with. Locate the lender who charges the lowest fees.  Refer to our Reverse Mortgage Checklist for information on the application process.

Alabama Senior Resources

The Alabama Department of Senior Services aids seniors by offering information about caregiver resources, aging and wellness support and other programs including home meal delivery to seniors in order to aid them in maintaining independence in their own homes. Many offices are available, including those in Montgomery, Wilcox, Jefferson, Mobile, and Tuscaloosa. To find an office near you, browse the Department's Area Agency map

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