A reverse mortgage can help retirees who need cash for living expenses and have sufficient home equity. What does that mean? A mortgage is simple, but what is the “reverse” of it? When does it end?
Essentially, a reverse mortgage converts home equity into cash. No payments are due as long as you stay in the house. The loan is due when the borrower passes away, moves or sells the house. When the house is sold, whether by the borrower or the estate, the proceeds pay back the loan. If the sale value of the house minus associated fees exceeds the balance of the loan, the borrower or estate keeps the remainder. If the homeowner is deceased and the sale of the house does not cover the loan balance, the estate owes nothing further and the lender takes a loss.
A reverse mortgage can help a homeowner who has equity remain in his or her home, but the homeowner should be fully aware of the terms. If the borrower fails to pay property taxes, keep current on homeowner’s insurance payments, or maintain the condition of the home, the loan goes into default and the bank could foreclose the house.
To be eligible for a reverse mortgage, homeowners must be 62 or older and own their own home or be able to pay it off with the money from a reverse mortgage. If eligible, you can apply through any traditional lender. You will be required to meet with a reverse mortgage counselor before receiving the loan. If you already have a traditional mortgage, you can use the money from a reverse mortgage to pay it off, but it must be paid when the reverse mortgage begins. The terms of the mortgage vary in interest rate and payment type: the money can be received as a lump sum, a line of credit or monthly payment. Rates may be fixed or adjustable. In the case of the credit line or monthly payments, interest accrues only on the amount paid out, not the total amount of the loan.
If you have a reverse mortgage and want to sell the house, be cautious. You may not be able to sell the home if you owe more than the house is worth and cannot cover the costs of selling it. Contact your lender to obtain a payoff quote, or the approximate amount of money you will need to repay the loan. If you can sell, consider using a real estate attorney. In some states it is required when selling a house with a mortgage involved, and even if not required, the attorney can ensure that the payment of the mortgage is handled correctly so that legal issues don’t arise down the line. The buyer must be able to obtain financing or pay cash because the balance of the reverse mortgage must be paid in full at the time of the sale.
In terms that don’t require a degree in finance to comprehend: a reverse mortgage allows homeowners to borrow against the value of their home. However, due to higher fees than traditional mortgages, it won’t be beneficial if you plan to move within a few years or need to borrow a small amount. It’s available, but it may not be your best option.