A reverse mortgage is, in a nutshell, a loan. A homeowner who is 62 years old or older and has a significant amount of home equity may borrow against the value of their property and receive cash in the form of a lump sum, set monthly payment, or line of credit. In contrast to a forward mortgage, which is used to purchase a property, a reverse mortgage does not require the homeowner to make loan payments.
Rather than that, the whole loan sum becomes due and payable upon the borrower’s death, permanent relocation, or sale of the house. Federal laws require lenders to arrange transactions in such a way that the loan balance does not exceed the home’s worth.
And that the borrower or borrower’s estate is not liable for the difference if the loan balance does exceed the home’s value. This might occur as a result of a decline in the home’s market value or as a result of the borrower living an extended period of time.
Equity in Cash
Reverse mortgages may help seniors whose net worth is largely determined by the value of their property get much-needed cash. On the other side, these loans may be prohibitively expensive and complicated, as well as vulnerable to fraud.
In this blog we will explain how reverse mortgages operate and how to avoid common problems, allowing you to make an educated choice about whether a reverse mortgage is a good fit for you or your parents.
According to the National Reverse Mortgage Lenders Association, homeowners aged 62 and over accumulated $7.14 trillion in home equity in the first quarter of 2019. The figure is the highest it has been since the survey started in 2000, demonstrating how significant a source of wealth home equity is for retirement-age folks.
Home equity is only useable wealth if it is sold and downsized or if it is borrowed against. That is where reverse mortgages may help, particularly for retirees with low incomes and little other assets.
How a Reverse Mortgage Is Constructed
Instead of the homeowner paying payments to the lender, a reverse mortgage allows the lender to make payments to the homeowner. The homeowner has the option of receiving these payments in a variety of ways (which we will discuss in more detail in the next section) and pays simply interest on the revenues received.
The interest is rolled into the loan total, so the homeowner is not required to pay it upfront. Additionally, the homeowner retains ownership of the house. Over the course of the loan’s life, the homeowner’s debt grows and his or her home equity falls.
As with a forward mortgage, a reverse mortgage uses the residence as collateral. When a homeowner sells their house or passes away, the lender receives the funds to repay the reverse mortgage’s principal, interest, mortgage insurance, and fees.
Any earnings from the sale in excess of the amount borrowed are distributed to the homeowner (if still alive) or the homeowner’s estate (if the homeowner has died). In rare instances, the heirs may elect to pay down the mortgage in order to retain the house.
The Different Types of Reverse Mortgages
Reverse mortgages are classified into three categories. The most prevalent kind of mortgage is the home equity conversion mortgage (HECM). The HECM is the most common form of reverse mortgage that lenders provide on homes valued at less than $765,600.
Because it is the most common type, it is the one that this article will explore. If the value of your house is more, you may choose to consider a jumbo reverse mortgage, also known as a proprietary reverse mortgage.
When you get a reverse mortgage, you have six options for receiving the proceeds:
When your loan matures, you will get the whole amount in one lump payment. This is the only option that includes a set rate of interest. The remaining five have variable interest rates.
Monthly payments equal to principal and interest (annuity): As long as at least one borrower resides in the house as a primary residence, the lender will make consistent payments to the borrower. This is often referred to as a tenure strategy.
Term payments: The lender makes equal monthly payments to the borrower for a certain length of time, such as ten years.
A line of credit allows the homeowner to borrow money as required. The homeowner is solely responsible for the interest on the amounts borrowed from the credit line.
Monthly payments equal to the principal plus a line of credit: The lender guarantees monthly payments for as long as at least one borrower resides in the house as a primary residence. If the borrower needs more funds at any time, they may draw on the line of credit.
Term payments plus a line of credit: The lender makes equal monthly payments to the borrower for a certain length of time, such as ten years. If the borrower needs more funds during or beyond the duration of the loan, they may draw on the line of credit.
Would a Reverse Mortgage Benefits You?
A reverse mortgage may seem quite similar to a home equity loan or line of credit (HELOC). Indeed, a reverse mortgage, like one of these loans, may give a lump payment or a line of credit that you can use as required, depending on the percentage of your property you’ve paid down and the market value of your home.
However, unlike a home equity loan or a home equity line of credit, you do not need to have a steady income or strong credit to qualify, and you will not be required to make loan payments as long as you continue to live in the property as your main residence.
A reverse mortgage is the only method for seniors who do not want to be responsible for monthly loan payments or who cannot qualify for a home equity loan or refinancing due to restricted cash flow or bad credit to access home equity without selling the house.