What Is A Reverse Mortgage and How Does It Work?

If you're in your golden years or approaching retirement, you may be worried about the increasing cost of living. You may fall short on financial resources if you don’t plan well.

How to deal with tight financial situations? For many, the way to guarantee a secure and comfortable life after retirement is a reverse mortgage.

What is a reverse mortgage and how does it work? This post will guide you in understanding this financial process by answering some frequently asked questions regarding reverse mortgages.

What's A Reverse Mortgage?

Reverse mortgages are specific types of loans for senior homeowners, 62 years of age or older. Such loans allow borrowers to make use of their home equity without making monthly payments.

While borrowers pay their creditors on a typical forward mortgage, reverse mortgages work the other way around. The Reverse Mortgage loan providers fund their borrowers by dipping into the equity they have built up in their house.

You don't have to repay the loan provider regularly and you continue living in your house. Whereas if you sell the property, transfer out, or die, the loan must be settled immediately.

Who Is Eligible For A Reverse Mortgage?

To apply, the principal homeowner should be 62 years of age or older. Otherwise, if your spouse is younger, you can apply for a reverse mortgage when you meet the following criteria.

       ·       You own your house directly.

       ·       You have no other pending mortgages.

       ·       You live in the house.

      ·       You’ve made payments of property taxes, insurance, and other compulsory financial commitments, such as the association of homeowner's dues.

       ·       You agree to partake in financial counseling for customers facilitated by a HUD-approved advisor.

       ·       You agree to preserve the house and maintain it in top condition.

       ·       Your house is the residence of a single-family.

The requirements and criteria to qualify for a reverse mortgage loan vary with banks or providers. To learn more about your prospective loan provider’s requirements you can check on their websites or social media accounts such as Facebook, Twitter, etc.

How Do Reverse Mortgages Work?

A reverse mortgage is classified as negative amortization. This implies that with time, the mortgage balance is rising. For instance, if you borrow $100,000, based on the rate of interest on the reverse mortgage, by the time you sell or transfer your property, or pass away, you’ll have to pay more than the amount you've borrowed.

There can be several ways to get the funds allocated to you from your reverse mortgage loan: 

       ·       Lump Sums 

With the lump sum option, you can take the proceeds of your loan straightaway. The funds are usually released in two tranches, with the second release coming a year after the first. Such mortgage loans have fixed rates of interest computed based on the outstanding balance.

       ·       Tenure Payment  

With these payment terms, you get funded every month, provided that you're living in your house. What makes this approach ideal is its flexible interest rates.

       ·       Term Payment

Term payments are like tenure payment except that you receive monthly funding for a defined duration. Usually, such monthly payments are higher as compared to tenure payments. The rates of interest are also flexible.

       ·       Credit Line 

You don’t get any cash if you choose this payment mode. You'll get a credit line where you can withdraw money anytime. Your credit line increases over time, depending on the loan's adjustable rate of interest.

       ·       Mix And Match  

You may merge the choices above as well. For example, you may accept a lump sum cash payment, say $20,000, and receive a monthly payment of $200. If you want to adjust the options in the future, this can be accomplished by making an application and paying any processing fees or service charges.

How Much Will You Get With A Reverse Mortgage?

The sum you receive varies depending on your age, the valuation and location of your house, and the reverse mortgage loan expenses. The highest amount goes to the eldest homeowner residing in the house. Aside from that, the older the applicant, the lesser are the charges added on loans.

Costs For Reverse Mortgages 

The costs charged by banks and credit companies usually include: 

       ·       Application and Processing fee 

       ·       Interest 

       ·       Insurance policy 

       ·       Origination fee 

       ·       Service Charges (monthly) 

       ·       Closing costs

Usually, these expenses are charged to the original loan. HECM (home equity conversion mortgage) loans are often the cheapest available reverse mortgages you can avail from banks or mortgage firms.

When you apply for a mortgage loan other than a state or HECM loan, consider the rates and added fees. Analyze if you can afford to pay the extra cost and if the gross loan amount that you'll receive is worth the charges that you may incur.

The Pros And Cons Of Reverse Mortgages 

Whenever you need cash, borrowing with your home equity is a solution. Nonetheless, mortgage loans have benefits and drawbacks.

Here are the key details to bear in mind: 

 Pros 

       ·       The borrower needn’t pay monthly in respect of their balance of the loan.

       ·       Funds provided by the reverse mortgage loan can be spent on monthly bills, healthcare costs, and the like.

       ·       Funds can help the borrower enjoy retirement.

       ·       In case the borrower passes away, spouses not noted on the reverse mortgage loan may stay in the home.

       ·       Borrowers threatened with foreclosure may apply for a reverse mortgage loan to make up for the current mortgage and prevent foreclosure.

Cons 

       ·       The borrower must always maintain the property and pay any taxes and insurance.

       ·       Reverse mortgage loans require you to spend from your home equity line of credit, which can be a primary source of money.

How Is Reverse Mortgage Different From Other Loans?

Reverse mortgage loans are different from traditional loans because they work in a totally different way. A conventional loan is a decreasing debt, increasing equity loan, while a reverse mortgage is decreasing equity and increasing debt loan. This means the sum you've borrowed is diminished as you make repayments with a typical or a forward loan. Hence, your home equity is increasing over time.

On the other hand, you don't make periodic payments with the reverse mortgage. Thus, as you receive funds and accrued interest, your loan balance increases and your house equity is reduced.

However, there's a secret not known with reverse mortgages. There’s no payment due or penalty of any sort. You can pay the balance either partially or in a full refund, anytime without penalties.

How To Choose The Right Reverse Mortgage Loan Provider?

When searching for reverse mortgages, it’s best to consult with a HUD-certified agent. In this process, you can learn about the pros and cons of this type of loan. That is, of course, in addition to getting some useful details to help you make an informed decision.

Before shopping around, decide on how much you want to borrow from reverse mortgage providers. Weigh how much you need depending on your financial capacity. Once you receive quotes, compare loan terms and charges.

Mortgage insurance rates are usually the same among borrowers, but some costs may vary considerably. These include borrowing costs, loan fees, service charges, and additional fees.

Should You Get A Reverse Mortgage?

Reverse mortgages are not perfect for everyone. If you’re unable to keep up with the cost of maintaining your house, then a reverse mortgage isn’t a useful solution. And if you unexpectedly pass away, your family members who inherit the house may get caught in a tight financial position whenever the debt is payable.

However, if you don't have any descendants left for your house, a reverse mortgage isn't such a bad thing. If you're all right about your home getting sold to pay off the mortgage after passing away, this choice may be worth considering.

Furthermore, you should also consider that you're not getting younger. Applying for a standard loan may become a challenge as banks and loan providers consider the age of the applicant. While it's true that reverse home mortgages have their drawbacks (so do all other loans), it can be the best possible option for you.

Tips For Borrowers

Myths regarding reverse mortgages can lead borrowers to make uninformed decisions. Qualifying seniors may proceed too quickly without understanding the possible effects of their financial choices. Here are some tips to consider before applying.

       ·       Clarify two essential aspects in choosing the appropriate reverse mortgage loan for your situation. How long will the loan last? How much financial risk can you accept?

       ·       Because mortgage providers use technical jargon, you must study loan terms before you continue loan-shopping. This will help you to choose the best lender and avoid loan sharks.

       ·       Improve your likelihood of your mortgage loan application getting approved by understanding how lenders assess your worthiness as a borrower. Don’t waste valuable time applying for loans which will end up getting denied. Before submitting a loan request, you must ensure that you meet all the relevant requirements.

 

The Bottomline

A reverse mortgage loan is an advantageous option that you can consider as part of your retirement plans. However, before applying for this kind of loan, evaluate if the loan is appropriate for your needs. An informed and fact-driven decision will take you a long way. Consider the points mentioned above as a guide and make the right decision for a happy retirement.