A Reverse Mortgage in real estate can be termed as a home loan which allows you to convert part of the home equity that you’ve built up over the years while making mortgage payments into cash. This loan places your home as a collateral.
By terming it as reverse, it means that you’re the one receiving money as opposed to making monthly payments to your lender. Your loan amount also increases over time in contrast to it decreasing as you pay each monthly payment. This concept can be likened to taking a second home equity loan or mortgage.
Reverse Mortgage is only applicable to people aged 62 years and above. There is no requirement to repay the loan and this valid until the day you vacate out of the home.
You can get money to run any kind of errand or supplement your savings and any other modes of income that you have via this loan. Sounds great, right? You should, however, note that this loan is quite complicated to unwind and it reduces your assets that you’ve set apart for your successors.
One of the major sources of Reverse Mortgage is HECM (Home Equity Conversion Mortgage). It is considered to be cheaper for borrowers since it is backed up by the government and the rules behind it make the loans offered consumer friendly.
So how do you qualify for a Reverse Mortgage?
- You should have a home that belongs to you, and not a rented property.
- You need to be 62 years of age and over.
- You should have enough equity in your house since you are drawing money from your home.
- You must have the financial capacity to consistently pay for home-related expenses such as insurance premiums and property taxes to ensure that the property value is maintained and you remain its sole owner.
- If you have a pending first mortgage, you can receive a Reverse Mortgage on condition that the Reverse Mortgage will become the property’s first lien. This means that borrowers can pay off the pending mortgage debt with a portion of the reverse mortgage. This works best if your home has 50% equity.
There are several factors that play a role in determining the amount of money that you can receive from loans. These include:
The higher your home equity is, the more loan amount you can get. It works best for borrowers who’ve been consistently paying their loan over the years and the mortgage is almost completely cleared off.
Payments Made Periodically
You can settle on the option of receiving consistent payments which can be on a monthly basis. These payments can be lifetime or for a limited predefined time period, for instance, 10 years. In the event that your loan is outstanding owing to the fact that all borrowers have shifted from the house, the payment seizes.
Line Of Credit
You can decide to use a line of credit as opposed to taking cash instantly. This gives you the provision to get money when you need it. The beauty of this method is that you get to pay interest only on money that you’ve actually borrowed. Your credit line also has the potential to grow with time.
The lower the interest rate is the more amount of money in form of a loan you can receive from the Reverse Mortgage.
You can receive all the money in one payment. The interest rate on the loan is fixed. Loan balance increases over time with the continuous increase in interest.
The youngest borrower’s age greatly affects the amount of money you receive. Older borrowers can get more. Excluding the younger borrower in order to receive a higher payout could be risky since the younger borrower will have to vacate the home in the event of the death of the older borrower due to him/her being excluded from the loan.
Using A Combination
You can make use of a combination of all the factors listed above. You may, for instance, initially take a small lump sum and then maintain a line of credit for use later.
Reverse Mortgage Costs: What Do They Entail?
Getting a Reverse Mortgage involves the payment of fees and interest. The fees are incorporated or financed into your loan. They minimize the equity amount in your home which means you’re left with less in your estate. It is advisable to pay out the fees using money from your pocket as opposed to paying interest associated with the fees over many years.
You’re also obligated to pay closing costs similar to those of a home refinance or purchase. You’ll need to do an appraisal, file documents, and have your lender review your credit. You can manage some of these costs but others are beyond your control.
Servicing fees from a Reverse Mortgage can give you sticker shock because of how high they are. There are, however, maximum limits in Home Equity Conversion Mortgage fees.
You are also subject to paying insurance premiums to the Federal Housing Administration since Home Equity Conversion Mortgages have the backing of the Federal Housing Administration which minimizes your lender’s risk. The initial mortgage insurance premium ranges between 0.5-2.5% and an annual 1.25% fee for your loan balance.
With regards to repayment, Reverse Mortgage doesn’t involve monthly payment, rather, the loan balance is payable the moment the borrower makes a permanent shift from the home either upon selling the home or in the event of death.
The debt payable will sum up to the cash amount received plus the accumulated interest on the borrowed money. This debt keeps growing over time since you’re borrowing but not making payments. The debt becomes due upon the borrower’s exit from the house, and it needs to be repaid.
In the event that you fail to oblige to the agreed terms such as paying property taxes, your loan may become due and you will be required to pay.
Reverse Mortgages are repaid via selling a home. If the house sells more than what you owe, the extra amount is handed over to you. If it sells for less than what you owe, you’re not obliged to pay for the pending money with a Home Equity Conversion Mortgage. In other words, you are free from the debt.
However, if your successors make the decision to retain the home, the full loan amount involved is due regardless of whether the loan balance is more than the value of the home.
If you’re a homeowner aged 62 years and above, getting a Reverse Mortgage can be quite advantageous to you in the long run. With no income needed on your part, accessing it is easy even when you’re on retirement. Why not try it today?