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 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.
Transferring Ownership
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 originator.
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.
Generates More Income
Reverse mortgages can be a valuable financial tool to generate more income in retirement. The pros of a reverse mortgage include that the income is not taxable, and it helps seniors manage their money. Another benefit that is equally appealing is that you do not have to move to live better on your retirement income. It’s important to factor in the pros as you determine if a reverse mortgage is right for you.
Have Access To Equity
A reverse mortgage allows consumers to have access to the equity in their homes. Another one of the pros is that there are no guidelines as to how the money can be used. You can use the extra money any way you choose. People can access the money to help pay their living expenses. Other people may want the money to pay off large bills, such as medical bills or credit card bills.
Get The Medical Care You Need
Even if you already have a mortgage on your home, you can still take advantage of the many pros of reverse mortgages. A change in home care needs is another reason to consider taking out a reverse mortgage. Older homeowners can get the medical care they need at home instead of having to move to a senior care facility. You can have peace of mind while maintaining your quality of life as you plan for a more financially secure future.
Other Financial Pros of Reverse Mortgages
Frequently, people in retirement have money invested in a variety of financial products. When you need that money, there are typically tax implications associated with withdrawing money. With a reverse mortgage, you have the opportunity to preserve your savings. Your home is probably one of your largest investments. You’ve worked hard, and your home’s equity should be available to you when you need it. This is one of the rewarding pros of homeownership. There is an added security of knowing that you can easily tap into what is rightfully yours.
Qualifying for Reverse Mortgages
Let’s look at some of the qualifications. If you can meet these requirements, you will be on your way to reaping the pros of a reverse mortgage. The first qualification entails who is on the title of your house. All of the owners of the home have to be 62 years of age or older. The borrower must reside in the home, and it has to be your primary residence. You’ll be required to live there the term of the mortgage.
The amount of money you owe on the house is also a factor. One of the following two requirements must be met to qualify. The first would be that you own your house outright. If not, you will have to be in the position in which you have a minimum of 50% equity in your home. This is determined by comparing the value of the house versus the amount owed on any loans on the house. This includes your first mortgage or a second mortgage or any home equity loans.
Check With Top Lenders
As is the case when making any financial decision, it is wise to do your own research. Check with the top lenders to compare the terms of the mortgage. It’s important to work with a leading lender or broker. Reverse mortgages are a financial obligation. It’s prudent on your part to make sure you understand your obligations. Reverse mortgages have been in existence for many years. They have proven to be highly advantageous for many older individuals. Your decision to apply for this type of mortgage can positively impact your lifestyle for years to come.
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.