Your Complete Guide To The Reverse Mortgage
Between the rising costs of health care, living expenses and limitations on Social Security, many Americans reach age 62 without enough money saved to sustain themselves through retirement. A reverse mortgage is a potential solution that can help you tap into the equity you have in your home and cover your expenses.
We’ll teach you a little bit more about reverse mortgages and how they work. We’ll also introduce you to a few different types so you can decide whether a reverse mortgage is a good fit for you.
What Is A Reverse Mortgage?
A reverse mortgage is a loan that allows you to borrow against the equity in your home. It can also help senior citizens use the equity in their home to cover retirement costs.
Unlike a traditional mortgage, you don’t make payments on a reverse mortgage. Instead, your mortgage company gives you monthly payments or a lump sum payment for the equity in your home. You may also choose to put your funds into a line of credit that you can access whenever you need it. You can use the money you receive from a reverse mortgage for almost anything, including supplementing your finances during retirement.
When you apply for a reverse mortgage, your lender orders an appraisal to decide how much money you can get over the course of your loan. You repay the loan when you sell the home, no longer live on the property or pass away.
With a reverse mortgage you remain the owner of the home and as a result you’re still responsible for paying insurance and property taxes. You must be at least 62 years old to get a reverse mortgage and you must live in your home as your primary residence. You must also meet your lender’s equity and financial standards to qualify.
A reverse mortgage is not free money. The “reverse” in “reverse mortgage” refers to your loan balance. With a traditional mortgage, you make payments every month and your loan balance goes down. It’s different with a reverse mortgage: You remain in control of your home but your debt goes up as long as you keep receiving payments.
Types Of Reverse Mortgages
There are three main types. Let’s take a look at the differences between them.
Single-purpose reverse mortgage: A single-purpose reverse mortgage is a loan for a single purpose that the lender specifies beforehand. For example, the lender might say that you can only use the loan for home repairs, property taxes or insurance premiums. While these types of reverse mortgages come from local governments and charitable organizations, they aren’t available everywhere.
Proprietary reverse mortgage: A proprietary reverse mortgage is a reverse mortgage issued by a private lender. If you have a high-value home, you may need to take a proprietary loan to get a reverse mortgage.
Home equity conversion mortgage (HECM): HECMs are the most common type of reverse mortgage, and you can spend the money you get from a HECM on anything. HECMs are also government-backed up to $726,525. Because of this, you may want to seek out a proprietary reverse mortgage if your home is worth more than $726,525. There are a few qualifications you need to meet to get a HECM.
For the sake of simplicity we’ll focus on HECMs because they’re the most common type of reverse mortgages.
How Does A Reverse Mortgage Work?
When you get a reverse mortgage, the first order of business is to pay off any existing debt that’s still on your original mortgage. You get the remainder of the money from the loan once your existing mortgage gets paid off and you can get the full value of the loan if you own your home outright.
Your lender gives you money in a lump sum, through monthly payments, with a line of credit or any combination of the three. Lenders also add fees and interest to the amount you owe every month. As your debt accumulates, your home equity shrinks.
The loan gets paid back when the borrower no longer lives in the home. As previously stated, this usually happens when you move, sell the home or pass away. It can also happen if you don’t uphold the responsibilities of the loan. Keep in mind that you still need to pay property taxes and homeowners insurance while you live in the home. You’re also obligated to maintain the condition of the home and cover maintenance costs. You may lose your home to foreclosure if you fall behind on property taxes, live outside of your home for more than half the year or let your home deteriorate.
You may still sell your home if you have a reverse mortgage. However, you must pay back the debt you’ve accrued after you sell your home. Before you list your home for sale, contact your reverse mortgage lender and confirm the amount you owe. You may keep the remainder and put it toward a new home if your home sells for more than your appraised value. If your home sells for less than what’s owed on the loan, you won’t be responsible for paying the difference. You’ll never pay more on the loan than the value of your home.
You may wish to leave your home to your children or other relatives after you die. A reverse mortgage can make this difficult because you accept a lien on your home. A lien is a bank’s legal claim to an asset – your home. In other words, the bank has the first claim on your property once you’re gone from the home and the debt you accrued now falls on your heirs.
However, your heirs have a few options. They can pay off the debt you owe by purchasing the home for the amount owed or for 95% of the appraised value – whichever is less. This can be done by paying on their own or refinancing the loan into a regular mortgage. They can sell the home and pay back the lien with the proceeds. If the home sells for more than it’s worth, they can keep the remining money. If it sells for less than what’s owed, they won’t have to pay the difference. Finally, they can allow the home to go into foreclosure. The decision your heirs make will usually depend on how much equity is in the home. You shouldn’t take a reverse mortgage if leaving your home to your heirs is a high priority for you.
How You Can Get Your Money With A Reverse Mortgage
Here are a few ways:
Lump-sum payment: You’ll get all of the money from your loan at once with a lump-sum payment. If you choose a loan with a fixed interest rate, this is the only way you can receive your money. If you get an adjustable rate loan, you can choose this option along with the following payment methods.
Monthly term payments: You get monthly payments from your lender for as long as you decide when you choose this option. The amount you get each month depends on how long you choose to receive payments. You’ll get the same amount every month and you won’t receive any further payments after your chosen timeline runs out.
Monthly tenure payments: Monthly tenure payments mean you receive payments for as long as you live in your home. Your lender uses a special underwriting process to decide how much you can get in your monthly tenure payments and then issues them each month as long as you live in your home full time. This option can prevent you from outliving your reverse mortgage.
Line of credit: A line of credit means you can access your money whenever you need it by taking out money as you use it. You only need to pay interest on the amount that you actually borrow. A line of credit can help you protect your equity because the value of your credit line will increase along with the interest rate of your loan each year (even if your home goes down in value).
A combination of payment methods: You can customize your payout to fit your unique expenses and needs. For example, you might want to take out part of your loan in a lump sum to cover repairs or pay down debt, then take the rest in term payments to cover your living expenses.
A reverse mortgage is not considered income no matter which payment method you choose. Instead, the IRS considers your reverse mortgage to be a loan advance because someone will have to repay it eventually. This means you can take a reverse mortgage without worrying about how it will affect your Social Security income or Medicare benefits. However, the loan may affect other government assistance programs like Medicaid and Supplemental Security Income. We recommend speaking to a financial advisor to make sure this is the right option for you.
Benefits Of A Reverse Mortgage
A reverse mortgage can offer several benefits:
- You get to remain in your home and your name stays on the title.
- You can access your home’s equity without selling your home or making monthly mortgage payments.
- There are no hard credit score requirements to get a reverse mortgage.
- Reverse mortgages are immune from declining home values because they’re nonrecourse loans. Nonrecourse loans are loans that don’t allow the lender to take more than the collateral (your home) to restore your debts. Therefore, you’ll never owe more than your home is worth.
Considerations Of A Reverse Mortgage
Reverse mortgages also have a number of things you might want to consider before you get one:
- Reverse mortgages decrease the amount of equity you have in your home.
- Your loan balance will increase if you don’t pay down your interest over time.
- You may outlive your loan’s benefits if you don’t choose the tenure payout method.
- A reverse mortgage makes it much more difficult for your heirs to benefit from the equity of your home after you die.
A reverse mortgage is a type of loan you can use against the equity in your home as long as you’re 62 or older. A reverse mortgage allows you to stop making monthly mortgage payments and still live in your home. Your lender gives you a loan to pay off your current mortgage and you can keep whatever is left over.
You can use the money you get from a reverse mortgage for anything, and you can get your money in a lump sum, monthly installments or in a line of credit. You’re still responsible for paying for property taxes, insurance and maintenance costs. The bank may foreclose on your home if you fall behind on any of these. Either you’ll repay the loan when you leave your home or your heirs will pay it off when you pass away.
Reverse mortgages can be a good idea for senior citizens who need more monthly income but still want to live in their home. However, a reverse mortgage might not be the best choice for you if you want to pass your home down to your children.
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