Every year, millions of individuals and couples across the United States receive reverse mortgages.
While a reverse mortgage can be a good tool for helping older adults manage their finances, it’s important to understand all the benefits and disadvantages of reverse mortgages. The following guide provides simple answers for understanding how reverse mortgages work.
What is a Mortgage?
Many people understand how a regular mortgage works. With a regular mortgage, an individual makes a down payment on a home. A bank then provides a loan to cover the rest of the cost of a home. The bank maintains ownership of the property until the individual is able to pay off the loan in its entirety. Once the loan is paid off, the property transfers from the bank to the individual. For the duration of the mortgage, an individual will be required to make monthly payments towards the principal on the loan. With a traditional mortgage, an individual is required to supply answers to a variety of questions regarding their income and job. This could include bank statements, payroll receipts, credit rating reports, and much more.
What is A Reverse Mortgage?
With a reverse mortgage, things are a little bit different. Reverse mortgages provide a lump sum of money to a homeowner. When that individual dies, the house’s title is transferred back to the bank.
In most cases, reverse mortgages are only available to homeowners with a free and clear title to their home. Once they own their home, they can borrow money against the equity in it. At the same time, they can continue to live in that home until the end of their lives.
When an individual signs up for one of these types of mortgages, a professional assessor will visit the home. The assessor will then make an offer to the family for an amount that is less than the value of a home. This value will be based on the expected lifespan of the homeowner.
For example, imagine that a couple has paid off their home in its entirety. They decide to get a reverse mortgage. They are both around age 50. When getting reverse mortgages, the assessor will calculate the value of the home plus the amount of time that both the homeowners are expected to live. In this case, the mortgage originator would expect the couple to live for at least another 30 years. If a home has a total value of $500,000, the couple would be able to get a reverse mortgage for $150,000 to $200,000.
The couple will owe no payments if they accept a cash payout. However, when they die, the home will transfer to the ownership of the mortgage originiator.
Benefits of Reverse Mortgages
Reverse mortgages have some benefits and disadvantages. If an individual or couple has children, they won’t be able to pass on that home to them. In many cases, reverse mortgages aren’t a good idea in situations where offspring will be inheriting property.
If an individual or couple has no kids, a reverse mortgage is a great idea. Since it provides extra cash without any immediate downsides, it can help provide a financial cushion at times when it’s needed most. Since no action will be taken until both spouses have died, there’s no need to worry about timetables or deadlines. Instead, couples will get to enjoy their homes for the full length of their natural lives.
Getting an Attorney
While the answers in this guide are a good start for learning more about how a reverse mortgage works, it’s important to remember that this article is only a starting point. If you’re considering a reverse mortgage, it’s a good idea to talk with an attorney or other professional. They can help you with answers to many common questions about this process. By learning all the answers you can before starting, you’ll be able to manage your finances in a sustainable way. In addition, there are a variety of online resources that can provide answers to questions about reverse mortgages.