A reverse mortgage is something of a loan. It allows homeowners who are at least 62 years old and with significant equity on the home to borrow against the value of their property, receiving payments either as a lump sum, fixed monthly payments or as a line of credit. With a reverse mortgage, the homeowner is not required to make any loan payments. Instead, the borrower repays the loan when they pass on, move away, or the home is sold. The most common type of reverse mortgage is called a home equity conversion mortgage (HECM), and it is often powered by the Federal Housing Administration (FHA).
HOW A REVERSE MORTGAGE WORKS
Suppose you take a reverse mortgage, the title to the property stays in your possession while the lender makes payment to you. You get to decide on the most suitable way to receive these payments, and you are only expected to pay interest incorporated into the loan balance. That means that there is no need to pay anything upfront. However, during the span of the loan, your debt increases while your home equity decreases.
The home is sold when you move or pass on, and the proceeds go to the lender as payment for the loan’s principal, interest, mortgage insurance, and fees. Any excess goes to the borrower or their estate. Some heirs have been known to pay the loan to keep the property.
BENEFITS OF A REVERSE MORTGAGE
Reverse mortgages are quite popular because of the tons of benefits that they offer which include:
Elimination of Monthly Mortgage Payments: As long as you are the homeowner and live in it as your primary residence, you never have to make mortgage payments.
Lots of Cash Advance Options: You get a load of payment options, including a line of credit, monthly cash advances, a lump sum, or a combination of two or more. The best part is that you get to choose what works best for you.
Loan Balances Are Deferred: You and your heirs need not bother about the loan balances except when you pass on or sell the property. Other conditions are when you relocate, if you fail to pay property taxes or hazard insurance, if you violate any of the loan terms, or you fail to maintain your property properly.
It Is a Great Source of Income: Once you have a lot of equity in your home, a reverse mortgage can be a great source of income for you since you have the option of getting your money as regular monthly payments or as a lump sum. This income could then be used to meet other needs. For instance, you could get a smaller home, go on a vacation, buy some property, or do just anything you want.
Reverse Mortgages Are Mostly Tax-free: You should always consult a tax professional about the tax implications of your situation. That said, most reverse mortgages are exempt from income or capital gains tax.
It Eliminates Worry: Reverse mortgages often come with a “non-recourse” clause in the agreement that shields you from owing money beyond the property’s value when the loan is paid off. So you needn’t worry about your spouse or heirs having to pay off the mortgage. The only time they are required to pay off the mortgage is if they intend to keep the property after your passing.
Gives you access to more capital: A well-planned reverse mortgage will secure your retirement by availing you of more funds to maintain a certain quality of life. Retirement might not be kind to you because you can no longer work like you used to. A reverse mortgage provides a source of income that can make life easier for you, especially when you don’t have significant savings or lack assets that could be converted to cash.
You get to stay in your property as long as you want: With a reverse mortgage, you get the option of staying put and growing old in your home. You don’t have to move because you are looking to get cash off the property. You only leave if you choose to.
A Reverse Mortgage Can Be Used To Pay Off Your Existing Home Loan: You can use your reverse mortgage to pay off an existing home loan since you don’t need to have paid it in full before getting a reverse mortgage.
WHO SHOULD GET A REVERSE MORTGAGE
Reverse mortgages are right for homeowners who are at least 62 years old. In this case, the home being put up for mortgage must be where you spend most of the year. It would help if you had little to low mortgage balance to pay on the home for a reverse mortgage to be right for you.
A reverse mortgage is not suitable for households whose homes are not adequately maintained since some of the mortgage proceeds will go towards that. In some states, the law prohibits reverse mortgages in co-ops, while FHA rules prevent cooperative housing owners from getting reverse mortgages. Folks without at least 50% of equity cannot apply for a reverse mortgage.
Reverse mortgages can be great financial tools once you understand how they work and can apply them the right way. So to get the most of any reverse mortgage, we’d advise you to take the time to study how they work. Try talking to a reverse mortgage counselor because it pays to know all there is to know about reverse mortgages before taking the leap.