Ever wondered, “What is a reverse mortgage?” Well, you’re not alone. While not as well-known as its traditional mortgage counterpart, this financial product is a powerful tool that can provide homeowners with a unique financial option.
A reverse mortgage is a unique type of loan that allows homeowners aged 62 and older to access the equity in their home. With a reverse mortgage, you receive funds from the lender while retaining your home’s ownership. The loan must only be repaid when you sell the home, move out permanently, or pass away.
Reverse mortgages have become an increasingly popular option for seniors looking to supplement their retirement income. But how exactly do they work? This comprehensive guide will provide an in-depth look at everything you need about reverse mortgages.
A reverse mortgage works differently than a traditional “forward” mortgage.
With a forward mortgage, you make monthly payments to the lender to pay down your loan balance over time. The lender’s stake in your home decreases as you build equity.
Conversely, with a reverse mortgage, the lender makes payments while your loan balance rises over time. You are not required to make any monthly payments. The loan is repaid when you sell the home or pass away. At that point, any proceeds from the sale must first go towards repaying the reverse mortgage lender before any remaining equity can go to you or your heirs.
The amount you can borrow depends on your age, current interest rates, and the appraised value of your home. Generally, the older you are, the more equity you have built up, and the more valuable your home is, the more money you can access through a reverse mortgage.
There are a few key reasons a reverse mortgage may make sense:
While reverse mortgages don’t have income or credit score requirements, there are a few rules about who qualifies:
While reverse mortgages don’t have income or credit score requirements, there are a few rules about who qualifies:
The home you use for a reverse mortgage also needs to meet the lender’s standards. It must be a single-family home or a 2-4-unit property that you occupy. Condos and manufactured homes may also be eligible, depending on the lender.
Reverse mortgages come with several upfront costs you’ll need to pay, including:
These costs mean that reverse mortgages can be more expensive than other options like home equity loans or lines of credit. Shop around between lenders to find the best rates.
HUD now requires lenders to provide borrowers with a Total Annual Loan Cost (TALC) estimate. It shows the projected average annual costs of the loan based on your life expectancy, so it’s easier to compare offers.
There are a few different options for how you can receive your reverse mortgage proceeds:
Reverse mortgages can be beneficial if used carefully, but they do come with some risks to be aware of.
To avoid problems, have an independent advisor review the loan terms first. Only borrow what you reasonably expect to need, build in a buffer for home value fluctuations, and look for a lender that offers counselling before signing up.
Before committing to a reverse mortgage, also consider if other options may better suit your needs:
Lenders require borrowers to submit annual occupancy certificates confirming that you still live in the home most of the time. This is to ensure you comply with the residency requirements and that the bank can get repaid when the home is sold. If you permanently move out, the reverse mortgage becomes due.
When the last surviving borrower dies, the loan balance becomes due and payable. Your heirs can choose to repay the reverse mortgage and keep the home or sell the property to settle the debt. Any remaining equity after repaying the lender would go to your estate.
In most cases, the funds you receive from a reverse mortgage are not taxable. They are essentially an advance taken against your home equity. However, you may owe taxes later if you sell the home for a net profit.
Reverse mortgages can be complex products with major financial implications. Take your time with carefully evaluating your specific situation. Consult with financial and legal advisors beforehand.
While not right for everyone, reverse mortgages may be viable for cash-strapped seniors who need to supplement their retirement income or pay for in-home care costs. If used strategically, they can provide access to home equity without having to sell the property or make loan payments.
Just run the numbers, compare alternatives, and read the fine print first. With proper planning, a reverse mortgage could give you the funds you need to enjoy your retirement on your terms.
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Disclaimer
*The information this blog provides is for general informational purposes only and is not intended as financial or professional advice. The information may not reflect current developments and may be changed or updated without notice. Any opinions expressed on this blog are the author’s own and do not necessarily reflect the views of the author’s employer or any other organization. You should not act or rely on any information contained in this blog without first seeking the advice of a professional. No representation or warranty, express or implied, is made as to the accuracy or completeness of the information contained in this blog. The author and affiliated parties assume no liability for any errors or omissions.
