Your Guide to Reverse Mortgages (and How They Could Help)

Introduction

If you do not want to pay loan payments for your mortgage and you need money, then you should consider a reverse mortgage.

What is a Reverse Mortgage?

Simply put, a reverse mortgage is a loan. If you are a homeowner who is 62 years old or old, you might qualify for a reverse mortgage. You should make sure that you have considerable home equity that you can borrow against your home’s value. In that case, you can receive money as a lump sum, a line of credit, or fixed payments on a monthly basis. A forward mortgage is the type of loan you need to purchase a home. But, a reverse mortgage does not need you to make any loan payments.

The entire loan balance will only be payable and due when the borrower permanently moves away, sells the home, or passes away. According to federal regulations, lenders need to organize the financial transaction to ensure that the loan amount does not surpass the home’s value. Additionally, your home will not be responsible for paying the difference, if the loan balance is bigger than the home’s value. This could take place if there is a sudden drop in the market value of the home or if the borrower lives for a long time.

How Does Reverse Mortgage Work

A reverse mortgage works when the lender makes payments to the owner of the home, not the other way around. Luckily for you, the homeowner gets to decide the type of payments they will receive and only pay interest on the payments received. There are several ways you can receive payments.  The interest is included into the loan balance, so the homeowner will not need to pay any money upfront. Additionally, as a homeowner, you can keep the title of your home. Similar to a forward mortgage, the collateral for a reverse mortgage is the home. As a homeowner, if you passed away or moved away, then the proceeds from the home’s sale go to the lender. The home’s sale will repay all of the reverse mortgage’s payments. This includes: the primary loan, any interest, any fees, and the mortgage insurance.

Keep in mind that the reverse mortgage payments are not taxable. This means that the Internal Revenue Service considers the money from reverse mortgage payments as a loan advance.

What are the Different Types of Reverse Mortgages?

You will find that there are three different types of reverse mortgages. The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM). With the Home Equity Conversion Mortgage, you will find that most lenders offer this type of reverse mortgage. (There are others, but you are most likely going to get an HECM reverse mortgage.) If your home’s value is below $765,600, then a Home Equity Conversion Mortgage is the mortgage for you!

Typically, you will need at least 50% equity on your home. But, that is calculated based on the current value of your home and not the time that you bought the home. That is the most standard way to qualify for a reverse mortgage. But, the eligibility requirements could be different from one lender to another.

Six Ways To Receive Payments From Your Lender

If you decide to take out a reverse mortgage, there are different methods of receiving the payment from the lender. (There are six ways, to be exact.) The different methods are the following:

Lump Sum Payments:

This means that you will receive all of the payments upfront, without any installment plan. However, you will only receive a lump sum payment when your loan closes.

 Equal Monthly Payments:

Throughout the time that you are living in the home as a primary resident, then you can receive from the lender constant and consistent payments. (This is the installment plan we were just referring to.)

Term Payments:

This means that the lender will give you equal monthly payments for a certain time that is agreed upon. Luckily, term payments allow you to decide how long you want to receive the payments from the lender.

Line of Credit:

The payments would be accessible for you to borrow whenever you want to. As the homeowner, you will need to pay interest on the amount that you actually borrowed from the line of credit.

Equal Monthly Payments + A Line of Credit:

The lender can provide stable monthly payments for the period of time that you remain in the house as a primary resident. If you might need funds at any point during that time, you can always access the line of credit. (You get the best of both worlds.)

 Term Monthly Payments + A Line of Credit:

This is the combination of term payments and a line of credit. You can receive stable payment every month, of equal amount, for a period of time. You can also access a line of credit, if you need more money during the term you agreed on with the lender. (Also, you can access the line of credit after the term.)

What Do You Get Out Of A Reverse Mortgage?

It has probably occurred to you that a reverse mortgage sounds just like a home equity loan. (It also shares a lot of similarities to a line of credit.) However, you do not need an income source or a good credit score to qualify for a reverse mortgage. Also, you will not need to make any payments for the loan, as long as you are staying in your home as a primary resident. With a reverse mortgage, this is the only method to access your home equity without having to sell the home. If you do not want to be responsible for monthly loan payments or you do not qualify for a refinanced mortgage, then you should consider a reverse mortgage instead.

Benefits of Reverse Mortgages

If you are 63 years old or older, then you should consider a reverse mortgage. It is a good way to obtain cash, especially if you do not have any other way to pay for your living expenses. The reverse mortgage will allow you to stay in your home and you will not have to move away. But, you have to maintain the property upkeep and maintenance. Additionally, you will need to pay for property taxes and property insurance. Other than that, it is still your home. (Sounds like a good deal, doesn’t it?)

Drawbacks of Reverse Mortgages

You should keep in mind, however, that a reverse mortgage will mean that you have to spend a large amount of the equity that has piled up. The equity that you will spend will be used on interest and loan fees. Additionally, your heirs will not be able to inherit your home after you pass away. A reverse mortgage is a better long-term solution, rather than a temporary solution. (Keep that in mind before you take out a reverse mortgage.)

Also, if someone else is living with you in your home, then they lose the right to live in the home after you pass away. (Those are the rules and the sacrifices that come with a reverse mortgage. If you think it is not worth it and you will lose more than you should, then you should not take out a reverse mortgage.)

How Can You Get Reverse Mortgages?

If you want to take out a reverse mortgage, then you cannot knock on any lender’s door. A reverse mortgage is a specialty product, which means that there are only particular lenders that can offer them. This is where the power of research comes in. You need to research your way to the right lender and make sure that you both accept the terms. It would be best if you apply for a reverse mortgage with different companies and find out which company offers the lowest fees and rates. (Yes, reverse mortgages are regulated by the federal government. But, there is still space where a lender can charge you extra.)

Reverse Mortgage Scams Are Possible

Reverse mortgages are tempting for borrowers who need a solution for their financial concerns. This is why it is possible that you could fall into a scam. There are scam artists and home-improvement contractors that could aim for you to take out a reverse mortgage loan, so that you can pay for home improvements. (Or, so that they get paid.) There is a possibility that the contractor will not deliver what you need or give you quality work. Or, they could steal your money all together.

Additionally, there is the possibility that someone takes advantage of you by using the power of attorney to take out a reverse mortgage on your home without your consent. This could be a relative, a caregiver, or a financial advisor.

Reverse Mortgages Can Lead To Foreclosure (So, Watch Out!)

You might find your home facing the possibility of foreclosure because of a reverse mortgage. Yes, you are not responsible for any of the mortgage payments. But, you need to meet certain conditions for a reverse mortgage. If you do not meet these conditions, then you are giving your lender the option to foreclose your home.

The reverse mortgage borrower (that would be you) needs to meet these conditions. First of all, you need to live in the home and keep up the maintenance. Also as the homeowner, you need to stay up-to-date on property taxes and home insurance. Both of these conditions exist for a reason. If you do not keep up with the maintenance, then the home’s value will decrease. As for the property taxes and home insurance, you will need to remain on top of those fees. If something happens to your home and you do not have any insurance, then the costs will come out of the lender.

Conclusion

In conclusion, you should consider a reverse mortgage as a long-term solution and not as a temporary fix. According to Investopedia, “reverse mortgage loans allow homeowners to convert their home equity into cash income with no monthly mortgage payments.” So, make sure you think long and hard before you decide on taking out a reverse mortgage. (The most important thing to ask yourself is whether it is worth it or not.)

Previous articleCan Self Employed Individuals Apply for Unemployment?
Next articleNational Eviction Protection is Gone, Now What?