Reverse Mortgages: The Whole Guide
There is an option for house owners who are 62 years old and older to use their equity in a reverse mortgage. Homeowners who own their property outright or have a sizable equity in it can use a reverse mortgage to access some of that value without having to pay back the loan until they sell their house.
As a homeowner, you may be wondering why someone would want to take out a loan against their property. Here's what you need to know about reverse mortgages if you're thinking about getting one.
What is a reverse mortgage, and how does it differ from a regular mortgage?
In a reverse mortgage, homeowners over the age of 62, who have traditionally paid off their mortgage, can borrow some of their home's value tax-free. A reverse mortgage differs from a traditional loan in that the lender pays the borrower instead of the other way around.
There is no monthly payment, but the loan must be returned if the homeowner dies, permanently moves out of the home, or sells the property.
The Home Equity Conversion Mortgage (HECM), which is guaranteed by the federal government, is one of the most common forms of reverse mortgages.
It's important to understand how a reverse mortgage works
However, in actuality, even if a homeowner has paid off their mortgage, they may not be eligible to take out a full reverse mortgage.
When calculating the maximum amount a homeowner can borrow, the "principal limit," factors such as the age of the youngest borrower or the non-borrowing spouse who qualifies play a role.
Higher principal limits are available to homeowners who are older, whose property is more valuable, and whose interest rate is lower. Variable-rate HECMs may cause the amount to rise. There are a variety of choices when it comes to a variable rate
- As long as at least one borrower has their primary residence in this property, they will be able to make regular monthly payments.
- Fixed monthly payments for a pre-determined amount of time agreed upon in advance.
- The ability to borrow money from a credit line until it runs out.
- For as long as you remain in the house, a combination of a line of credit and fixed monthly installments.
- However, if you want to receive one lump-sum payment instead, you will receive a fixed interest rate on your HELOCs.
Reverse mortgage interest accrues on a monthly basis, and you'll still be required to keep up with property taxes, homeowner's insurance, and other home maintenance costs.
In a reverse mortgage, who becomes the legal owner of the property?
In a reverse mortgage scenario, you own the house just like in any other.
However, if the borrower dies or moves, the mortgage must be repaid in full by the new owner. A personal financial adviser with nonprofit credit counseling and debt management service Take Charge America says that if you can't or won't pay off the debt, the lender has the option of selling your property to reclaim the money it's owing to you.
When a house is sold for less than what is owing, "typically, the owners or beneficiaries are not held accountable for any charges," says Sullivan.
What is the purpose of a reverse mortgage?
Reverse mortgage funds can be used to supplement retirement income, pay for home repairs, or cover out-of-pocket medical bills, says Bruce McClary, a representative for the National Foundation for Credit Counseling.
According to McClary, a reverse mortgage can prevent seniors from using high-interest lines of credit or other costly loans in situations when normal income and savings are insufficient.
Requirements for a revolving mortgage loan
Reverse mortgages are only available to homeowners who are 62 years old or older. In addition, the following criteria must be met:
- You must be the sole owner of the home, or at the very least, have paid off the mortgage in full.
- Your principal residence must be in the property.
- Any federal obligation you owe must be paid in full at the time of your application.
- Continuing payments on property taxes, homeowners insurance, and homeowners association dues need that you have sufficient financial resources.
- A reverse mortgage counselor who has been approved by the U.S. Department of Housing and Urban Development (HUD) must conduct an informational session for you before you apply.
Elderly people should carefully arrange their finances to prevent running out of money too quickly and to ensure that taxes and insurance are paid on time, says McClary.