What is a Reverse Mortgage?
Reverse mortgages are an incredible financial tool open to people age 62 or above that have equity within their home and need cash for financial breathing room or simply to take that trip they’ve been putting off. A reverse mortgage offers a person the opportunity to obtain cash for their property while still maintaining all the benefits of a homeowner. People interested in obtaining this form of equity release can apply for one easily through many lending companies throughout the nation.
In a reverse mortgage, a company purchases a person’s home from them and is offered a choice between getting regular payments, similar to a paycheck, or receiving the amount in a lump sum. Regardless, the original homeowner will still be allowed to live within their home even though the home has been sold. The purchasing company will only acquire the property once the senior citizen no longer occupies it.
Reverse mortgages are helpful to any senior who requires income but doesn’t want to lose their home. In other situations, the person would have to sell their home to see any cash from the sale. At this point, that person would then have to secure another form of housing, which could potentially be expensive. A reverse mortgage essentially allows the homeowner to sell their home without losing access to it.
Reasons for Acquiring a Reverse Mortgage
Most retirees will consider a reverse mortgage when they either need a large amount of money immediately or they have found that they cannot live on their current monthly income. There are many expenses, such as medical debt, that can leave a senior citizen in a difficult financial situation. While seniors could sell their home, the costs of securing another home will usually be prohibitive. Instead, a reverse mortgage gives a person the chance to pay down debt immediately.
Many also find that they cannot live on the monthly income they have. Reverse mortgages give people over 62 the opportunity to turn the money they put into their home’s equity into a stable monthly or quarterly payment. This payment can be used for anything. Without an equity release, the homeowner will usually have to sell their home and purchase a smaller one. Not only is this a difficult process, but it also means that the senior will lose the home they are comfortable in.
Finding and Applying for a Reverse Mortgage
To qualify for a reverse mortgage the homeowner needs to be 62 years of age or older and needs to have substantial equity within their home. The homeowner doesn’t always have to own their home outright; a purchasing company may accept a reverse mortgage as long as the homeowner owns the majority of the home, however, the process is considerably simpler if the homeowner owns the entire property. In all cases, the owner must currently reside in the home they are mortgaging.
Applying for a reverse mortgage is usually a fairly simple process. The homeowner can decide how much money they need from the reverse mortgage and how they wish to be paid. The company will immediately disburse that amount, but it should be noted that the homeowner will still be responsible for property tax and insurance after the agreement is settled. The homeowner may choose to pay back the reverse mortgage or the reverse mortgage will be paid out by the homeowner’s estate when they pass. Commonly, the reverse mortgage company will assume control over the homeowner’s property following their passing.
Choosing Between Payment Options
When a person acquires a reverse mortgage, they usually have three options for disbursement: a lump sum, a recurring payment or a line of credit. Lump sum payments are often best if the senior has specific costs they need to pay off, such as medical debts. Recurring payments are usually better if the person requires supplemental income, which can be the case if their retirement plan or social security payments are not enough.
Otherwise, the homeowner can also choose to maintain a line of credit. A credit line is treated almost exactly as a home equity loan, with the expectation that the credit will be repaid. A line of credit is optimal in situations where the senior expects to get their money returned eventually or if they are paying a one-time expense.
Finalizing a Reverse Mortgage
Once a reverse mortgage has been obtained, the person will collect the funds. At this point, the person can do anything they desire with the money that is distributed to them. Reverse mortgages can be paid back, but there are sometimes repayment penalties that the homeowner should look into before acquiring the mortgage. Otherwise, the senior can usually allow the reverse mortgage company to be paid back through the property itself.
Homeowners should be aware that there are certain circumstances that will cause the loan to become due immediately. If the homeowner moves from the home for longer than a year or sells the property, the amount of the loan will become due. Additionally, if the homeowner falls behind on their property tax payments the lender may render the loan due right away. When the homeowner does pass their survivors will sometimes have the right to keep the property if they decide to pay the loan separately. Otherwise, the survivors will usually have to turn the property over to pay the loan.
Alternatives to a Reverse Mortgage
While there are some alternatives to a reverse mortgage, they usually have significant drawbacks. People that require a large cash payment may consider either getting a home equity line of credit (HECM) or selling their home. A home equity line of credit will offer them the lump sum they need, but they will also be required to begin paying back the loan almost immediately. This may not be feasible for senior citizens on a fixed income.
Selling a home is usually only a viable solution if the senior citizen already has somewhere else to live. Those that can live with family may be able to benefit from selling their home, but the trade off is their personal comfort. Reverse mortgages operate very much like selling a home but without this downside. Seniors may also potentially sell their home and purchase a cheaper home, but this often won’t give them the a significant amount of money.
Tips for Reverse Mortgages
As with all financial products, people should shop around for the best reverse mortgage rates and terms, because they aren’t all created equal. The largest drawback to a reverse mortgage is the fee associated with the loan itself. Seniors that shop for the least expensive loans will stand to gain more from the transaction. Loans that have lower penalties for early repayment are also preferable if the person wants to keep this option open.
Those interested in reverse mortgages should go over their loan paperwork carefully. Ideally, a lawyer should look over the documents before the loan is completed to ensure that the homeowner is fully protected and that they understand the ramifications of the lending process. Although coming at a cost, reverse mortgages are incredibly useful financial tools and can lend a second lease on life.