REVERSE MORTGAGES EXPLAINED: A SENIOR CITIZEN'S GUIDE
What exactly is a reverse mortgage? How does it work and who does it benefit? Also known as the HECM or home equity conversion mortgage in the States, the premise of reverse mortgages is simple enough – it’s a loan against your house, for people 62 years of age and older but unlike traditional mortgages, there are no monthly payments to be made while you’re alive. It’s a great way for seniors who have accrued home equity to supplement their retirement.
However, it’s not as straightforward as that and there are a lot of questions about this loan. If you’re looking at different options to maximize your finances for your retirement, you’re at the right place. Carry on reading to find out all you need to know about reverse mortgages for senior citizens.
Reverse Mortgages Explained
The best way to explain what a reverse mortgage loan is and how it works is to compare it to standard mortgages. With the latter, monthly payments are made to the lender to bring down the balance and in the process accruing equity.
In the case of a reverse mortgage for senior citizens, the borrower doesn’t have to make monthly payments on the loan, on the condition they stay in the house and continue with things like insurance and taxes. Unlike a traditional forward mortgage loan, the borrower receives payments and interest adds up while the home equity decreases. This type of mortgage works in the reverse, hence the term.
Remember that we said a reverse mortgage loan doesn’t need to be paid back as long as you’re alive? Well, that or if the borrower sells the house. They can, however, pay the loan back at any time, should they choose to. In order to protect all parties, reverse mortgage loans can’t exceed the value of the home. In other words, if the balance is $180,000 and the house sells for $135,000, the balance isn’t owed by the borrower. Should the house sell for a higher value than the reverse loan, the equity goes to the borrower, or should they have passed away, their estate is used as equity.
Let’s take a look at the most frequently asked questions about reverse mortgage loans.
Who Qualifies for a Reverse Mortgage?
Eligibility depends on a few factors. These include:
Anyone who is 62 years or older
Anyone who owns their home and it is their primary residence
It must be a single family or multi-family home or an approved manufactured house or condo
The house must be in good condition before you take the loan
You must have a counseling session with an approved HUD counselor before getting the reverse mortgage to make sure it’s what you need. There are definite advantages, but also a few disadvantages you must be aware of
You will need to have a financial assessment to ensure you can pay:
Homeowners Association fees (if applicable)
Basic home maintenance
What is the Amount I Qualify For?
The amount is based on the appraised value of the home and the age of the youngest spouse. Usually, the LTV (loan to value) is between 50% and 70% of the value of the home.
When Do I Need to Pay the Reverse Mortgage Back?
As long as you live in the house, it’s your main residence, and you’re able to cover expenses like homeowner’s insurance and property taxes, you don’t have to pay back the loan. The loan, however, becomes payable when the last surviving borrower passes away. It’s important to note the estate or any heirs have up to six months to refinance the house if they decide to keep it or they have up to 12 months to sell.
What is the Arrangement With the Lender?
In lieu of the reverse mortgage, you must continue to pay all the associated property costs including taxes, homeowner’s insurance and, if applicable, homeowners association fees. You also have to live in the house.
Do Any Heirs Still Receive Their Inheritance?
Yes, but only after the balance of the reverse mortgage loan has been paid. The remaining equity goes to them.
What are the Disadvantages?
A reverse mortgage loan is a smart way of supplementing your retirement income. However, you are spending what would be part of your heirs’ inheritance. Should you be considering this type of loan, it’s important to discuss this with your family.
A Reverse Mortgage Loan Sounds Like a Very Good Idea But is it Right For Me?
If you plan on living in your home for a long time and using your equity as a form of a monthly income, as a line of credit or both, a reverse mortgage is a very good idea. However, if you need the money for a short while, there are other more viable options.
Do the Proceeds Affect My Medicare or Social Security?
No, your Medicare and Social Security are unaffected but any needs-based programs like Medical and Medicaid might be.
What Documentation Do I need to Give the Reverse Mortgage Specialist?
The documentation needed might differ from company to company but it’s best to have the following:
A copy of your driver’s license
A copy of your Social Security card
A copy of your homeowner’s insurance policy declaration page
You might also be asked for:
A copy of the Power of Attorney if someone is signing on your behalf
A copy of your mortgage statement/s if applicable
If your property is in a trust, you will need a copy of it
If you have a court-appointed conservator you will need that information
If applicable, your bankruptcy discharge papers
How are the Funds Distributed?
The great news is reverse mortgage loans payments can be disbursed in a number of ways to suit your requirements. These include:
- A line of credit where you are able to draw funds needed, up to the approved amount
- As a modified tenure, which is a combination of scheduled monthly payments and a line of credit, for as long as you’re in the house
- As a modified term that combines line of credit and monthly payments for a certain amount of time, as chosen by the borrower
- As a tenure where monthly payments are made for as long as there is one borrower in the house
- A lump sum payment which is paid at closing
What are the Key Benefits of a Reverse Mortgage?
There are a number of key benefits, especially if you’re looking to for a source of additional income. These include:
You Have Access to Cash
The reality is not everyone is prepared for retirement, with working couples only saving around $5,000, on average, according to the Economic Policy Institute. In cases like this, if you’re lucky enough to have equity in your house, a reverse mortgage can help.
Counseling is Required
Different mortgage choices and confusing financial products that were meant to assist people in the past were often given with no understanding of how they worked. This resulted in borrowers losing money. Counseling is now required before agreeing to a reverse mortgage, which means people are able to make money-savvy decisions.
It Can Extend the Life of Other Savings
For the majority of Americans, their Social Security will be the main source of income in their retirement, with most collecting from 62 years, which means they don’t receive their full benefits. By using a reverse mortgage, you’re able to delay claiming your SS, increasing those earnings by as much as 8%.
A Reverse Mortgage Can Increase in Value
Unlike most loans, a reverse mortgage is one of the few that actually increases in value at the same rate it accrues interest.
A Reverse Mortgage is Flexible
You can choose how you want your money paid out. It can be a line of credit, a check or a lump sum payment.
There is No Time Limit In Which It Needs to be Paid Back
Unlike traditional loans, there is no limit in which a reverse mortgage must be paid back. In most cases, it’s after the last surviving homeowner passes away or moves. Once either of the above happens, the estate sells the house, using the money from the sale to repay the loan. If the house is sold and there isn’t enough money to pay back the lender, the lender has to accept the loss. They’re not allowed to claim money from the estate or the heirs.
What Happens if I Change My Mind and Don’t Want the Loan Anymore? Is There Anything I Can Do?
You have three calendar days in which you can change your mind and cancel the reverse mortgage. This is known as a ‘three-day right of rescission.’ Lenders might have different processes when it comes to canceling a loan, so it’s best to discuss this up front.
Reverse mortgage loans, a previously misunderstood financial product, is a smart way of accessing funds for your retirement. In fact, once you comprehend its many advantages, you’ll be wondering why people don’t have one.
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