Many people find that once they’ve reached retirement, the majority of their financial assets lie in their home equity. Reverse mortgage loans, also known as home equity conversion mortgages (HECM, an FHA program), are an option available to these individuals who find themselves in need of financial assistance after retirement, or after the age of 62. You may be one of these individuals, or the child of one seeking to relieve the financial stress of an aging parent.
Unfortunately, reverse mortgages can be confusing and there’s a lot of misinformation regarding the pros and cons of reverse mortgage loans muddying the waters. Is a reverse mortgage loan the right choice for your family? Read on to discover the facts about reverse mortgages and how they can help you or your loved ones.
What IS a reverse mortgage loan?
Reverse mortgages are aptly names because they act exactly reverse of regular mortgages. It is a loan, borrowed against the equity already accrued in one’s home, where the lender makes payments to the borrower. Instead of sending checks to the bank, the bank sends checks to you.
This is an option made to help seniors on limited income, so the loan does not have to be repaid until the house fails to be a primary residence for over 12 months, or if the resident dies. Typically, the house is then sold to repay the loan.
Who is eligible?
To qualify for a reverse mortgage loan you must be at least 62 years old, and a homeowner with significant equity in your home to not only make payments but to settle the home when the loan is repaid.
You must also be able to afford the other expenses of the home, including property tax, homeowner’s insurance and any other maintenance fees. A financial assessment will be made to determine a borrower’s residual income and credit score, although failing to meet the guidelines does not automatically disqualify you for a reverse mortgage.
Once you begin receiving payments, however, there are no restrictions regarding how the money from reverse mortgages must be spent.
Are there any upfront expenses?
Generally, reverse mortgages cost very little initially for appraisal fees and legal counsel, and the borrower is not responsible for any loan payments until the loan settlement. The bank does not own your home, even after the homeowner dies. The home is only ever considered collateral against the loan.
How can I receive payment?
There are several payment plans a borrower may choose from to best fit their needs. Here are the ways funds can be distributed:
- Lump Sum
- Monthly Annuity
- Combination of Lump Sum and Monthly Annuity
- Line of Credit
Legal or financial advice is suggested when choosing your reverse mortgage payment plan. Consider the long term implications of property maintenance, and how long you will be relying on reverse mortgage payments.
The amount you receive depends on a few factors, including the age of the youngest applicant, the home’s value, and the loan’s interest rate. If you are applying at a later age with a well-appraised home, for example, you will receive higher payments.
What are the terms of loan repayment?
The loan plus it’s interest must be paid in the event of the homeowner’s death, or if the homeowner moves or otherwise sells the property. Neither the borrower nor their children are responsible for more than the worth of the house, even if the homeowner outlives the point where principal and interest are worth more than the original loan.
Reverse mortgage loans can be the right choice for many families, especially those struggling to make ends meet after retirement. A limited income combined with medical expenses can be made easier by borrowing against the equity you’ve already paid into. If you meet the requirements and are financially responsible, reverse mortgage loans can be a powerful solution to post-retirement income troubles.