In the past decade, reverse mortgages have gained a lot of traction as a retirement tool. And yet, many people still do not understand reverse mortgages or their purpose. If you are one of those people, here’s what you need to know:
What Is It?
A reverse mortgage is a loan that allows borrowers to pull equity out of their home without having to make monthly repayments. While there are some risks and downsides, reverse mortgages can be a helpful financial strategy for some retirees.
How Does It Work?
After being approved, the borrower gets either a lump sum from the bank or monthly installments based on the equity in the house. That money can then be used for anything – health care costs, as supplemental income, debt consolidation, etc. The reverse mortgage loan does not come due until the borrower moves out, sells the home or dies.
Who Can Qualify?
Homeowners age 62 or older are eligible as long as they own their homes free and clear or owe just a small amount on their current mortgage. Borrowers must live in the home as their primary residence and must be current on all federal debts, property taxes and hazards insurance premiums. There are also certain financial criteria to be met, including sufficient income, credit histories and assets.
How Much Can Be Borrowed?
The amount of money that can be borrowed with a reverse mortgage will depend on your age, the value of your home, your ability to manage payments, the initial mortgage insurance premiums to be paid and the current interest rates. While you can never borrow 100% of your home value, in general the more valuable your home is and the more equity you have, the more you will be able to borrow.
What Happens to the Home?
The borrowers can continue to live in the home as long as they keep up with their property taxes, insurance and home maintenance. When one spouse dies, if the other spouse was not listed on the reverse mortgage, he or she may stay in the home. However, when that spouse moves or dies, the reverse mortgage comes due and the borrower’s survivors must sell the home to repay the loan, come up with the money on their own or sign over the deed to the lender.
When Does a Reverse Mortgage Make Sense?
Reverse mortgages can be useful for seniors who can still afford to pay their property taxes and insurance and take care of their home, but may need more cash for monthly income or to pay off a debt. It only makes sense if the borrowers do not plan to move.
Reverse mortgage do not make sense for borrowers who will depend on the proceeds from their home to help them through retirement. It is also not a good idea for those who are already struggling to keep up with their current homeownership costs.
All reverse mortgage borrowers are required to undergo financial counseling sessions with an independent party approved by the U.S. Department of Housing and Urban Development. These sessions are designed to ensure borrowers fully understand the implications of a reverse mortgage.