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.
A reverse mortgage is a type of loan granted to a person who is 62 years or older and has significant home equity. The borrower receives the amount for the value of their property through one of three ways: one single payment, fixed monthly payments, or credit.
The homeowner is responsible for paying interest on the amount received and therefore does not have to pay anything upfront because the lender will calculate the claim into the loan total. While a forward mortgage requires monthly loan payments and an initial principle, reverse mortgages do not require these.
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 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 for 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.
How Do You Pay Back a Reverse Mortgage?Regular mortgages are usually paid off over a particular term in monthly installments. Reverse mortgages, however, are repaid when the homeowner dies, sells their property, or vacates the household for longer than 12 months. The total earnings from the sale are often used to repay this type of loan balance.
If you pass away before the loan is due, your descendants will be responsible for repaying the amount. They can:
- Sell your house and utilize the cash to pay off your debt.
- Refinance into a standard mortgage or utilize their funds to buy a home for the amount owed on loan or 95% of the home’s appraised worth, whichever is smaller.
- Walk away from the loan by signing the title to the lender.
How Long Does A Reverse Mortgage Last?Since a reverse mortgage can be obtained by a homeowner who is 62 or older, the standard term of the loan is the length of time a borrower stays in his property after taking out the loan. The average period, according to Forbes Magazine, is roughly seven years.
Are Reverse Mortgages Tax FreePayments made on a reverse mortgage are treated as loan proceeds rather than income and are therefore not taxed. While you continue to reside in your house, the lender pays you the loan proceeds in a single amount, fixed monthly allowances, a line of credit, or a combination of all three.
What Happens to the House at the End of a Reverse Mortgage?The debt must be repaid when the last remaining borrower passes away. The majority of heirs will pay back the loan by selling the house. If your loan total exceeds the value of your property, your heirs will not be responsible for more than 95% of the appraised value. Your heir will then be the person who owns the house in a reverse mortgage.
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.