Reverse Mortgage - What is it? And Who Would Benefit from Using Them?
Preparing for your mortgage early on is essential. It will safeguard your financial future and ensure your loved ones are taken care of when you retire. However, most seniors are running out of funds quickly due to the economy, longer life expectancy, and life's unpredictability.
So, what happens when you come up short of funds during your retirement? Well, a reverse mortgage might work for you. But before applying for these kinds of mortgages, it would be best to know what it is and how it will benefit you. Here is what you need to know about reverse mortgages.
What Exactly Are Reverse Mortgages?
Generally speaking, they are also loans. Homeowners who are 62 years or older and have significant home equity borrow this type of loan against their homes' value. Borrowers can choose to receive the loan amount as a lump sum, fixed monthly payment, or line of credit. While homeowners are required to make fixed payments in a forward mortgage, you will not need to make payments when you get this loan.
However, the entire loan amount will become payable when you die, sell the property, or move away. According to federal regulations, lenders should ensure that the loan amount is equal to the house's value. The borrower shall not be held accountable if the lender fails to do so. For instance, you will not be liable if your house's value is lower than the loan amount. This usually happens when the borrower lives longer, or the market value of the house reduces.
Understanding How a Reverse Mortgage Works
These loans are a worthy alternative for seniors with considerable home equity. However, it can be expensive. These loans are also susceptible to scam. Understanding how the loans work is the first thing you should do to avoid the expenses and protect yourself from fraud. Keep reading to discover how a reverse mortgage works.
Recent studies by National Reverse Mortgage Lenders Association show that homeowners aged 62 and older have more than $7.14 trillion in home value. That is the reason why most of these homeowners choose to apply for this type of loan. This type of loan only works if the borrower sells and downsizes. The borrower should also get the loan against the value of the home. It is the ideal loan alternative for you if you have few assets and limited incomes.
With this type of loan, borrowers do not make monthly payments. Instead, lenders make payments to the borrowers. Moreover, borrowers choose their preferred method of receiving the payments. They will also have to pay interest according to the amount they receive. However, the borrowers will not have to pay anything upfront since the interest is added to the loan balance. It is also vital to note that the homeowner retains the title of the home. The borrower's debt will increase during the loan, while the house's equity will reduce.
As is the case with typical mortgage, the home will also be the collateral for this type of loan. The lender will take over the sale proceeds when the owner dies or moves. The proceeds will be used to pay the reverse mortgage principal, insurance, fees, and interest. However, the lender should remit additional profits to the owner if he or she is alive. If the owner has died, the lender will remit the payments to the borrower's estate. Some dependents choose to service the mortgage to keep their home.
Proceeds from these loans are not taxed. Although the homeowners consider the loan as an income, the IRS considers it as a loan advance.
Different Kinds of Reverse Mortgages
As you debate if a reverse mortgage works for you, it will also help to know the three types of these loans. We will be looking at the three kinds of reverse mortgage below:
Single-Purpose Reverse Mortgages
These types of loans are cheaper than the other two mortgages. Local government and state agencies offer single-purpose reverse mortgages. Some non-profit organizations also offer these loans. However, the loans are not available in every state. It is vital to note that this kind of loan can only be used according to the lender's specifications. To help you understand, borrowers can only utilize the loan to repair your home if the lender instructs directs you to do so. Single-purpose reverse mortgages work best for homeowners with low to moderate-income.
Proprietary Reverse Mortgages
They are private loans offered by private lenders. Proprietary reverse mortgages are offered according to the home's equity. For instance, with high equity homes might get a higher amount.
High Equity Conversion Mortgages (HECMs)
The federal government provides high equity conversion mortgages. The U. S. Department of Housing and Urban Development (HUD). Homeowners can use HECMs for various purposes. However, the amount you qualify for depends on various factors. The following are among the factors that will determine the loan amount one can borrow with these mortgages:
- Your age.
- Current interest rate.
- Your home's appraised value.
- Your ability to pay homeowner's insurance and property taxes.
To put it in perspective, you will qualify for a higher loan amount if you are older since you will have more equity and owe a lower amount. Some lenders might ask you to have a counselor to qualify for the loan. The counselor will help you choose the right type of mortgage and payment method. Homeowners can qualify for these loans regards of their income. Even so, lenders still have to conduct a financial assessment to determine your willingness to pay the loan.
With this type of mortgage, homeowners can choose various payment options including, single disbursement, term, tenure, line of credit. Borrowers can also settle for a combination of term and line credit. Borrowers can change the payment option by paying a small fee.
Making the Right Decision
When looking for the best reverse mortgage option, it is wise to ensure you make the right decision. Take the time to evaluate different options before making the ultimate decision. It is also advisable to ask several questions before choosing a lender.