What Is A Reverse Mortgage?
If you’ve heard the term reverse mortgage but don’t really understand what it means or how they work, here is a quick look at the basics of reverse mortgages and how they work.
We’ve all heard the commercials saying that you can get cash for your home while you continue to live there and have no house payments. This may sound too good to be true.
Reverse mortgages can work well for some retirees, but nothing comes without a price and it’s important to really understand the requirements of a reverse mortgage before you enter in.
Here is a quick look at the basic facts about reverse mortgages as you begin to gather the pros and cons.
Basic Facts About Reverse Mortgages
Reverse mortgages are loans
At least one of the borrowers needs to be age 62 or above
Those who take a reverse mortgage are borrowing against their home equity
Reverse mortgages do not need to be repaid as long as one of the borrowers lives in the house
Reverse mortgages usually eliminate any other ongoing mortgage payments
Borrowers can choose to receive a monthly payment, lump sum, or line of credit to use against the house (or even a combination thereof)
Reverse mortgages can be a welcome source of financial independence
It’s essential to comparison shop multiple lenders as offers can vary widely
As the name implies, a reverse mortgage is very much like a traditional mortgage, just in reverse. In a traditional mortgage, the bank hands over a large sum of money upfront so that the borrower can use it to buy a house. That borrower then pays it down over time with fixed monthly payments.
By contrast, with the most common forms of reverse mortgage, the borrower already has a house, which is usually all or mostly paid off. If they choose the monthly payment option, they receive fixed monthly payments from the bank that they can use on anything they like, and the amount owed to the bank grows over time as the borrower receives their monthly checks. The amount borrowed is only repaid in the event the borrower and their co-borrower (spouse) moves out of the home. This is a critical, and often misunderstood feature of these loans. – Lending Tree
How Can A Reverse Mortgage Help You!
Now that we know the basic facts surrounding reverse mortgages, here is a look at some of the ways a reverse mortgage can benefit a homeowner. Take a look and see if any of these will help you.
They can provide cash or “longevity insurance” when other sources of retirement income come up short or provide money for out-of-pocket health care costs or other sudden financial crunches.
Like a conventional mortgage, a reverse mortgage obligation is satisfied when the house is sold by the owners, the last owner has died or the home is sold by heirs. Any equity left over is kept by the last homeowner.
Since these loans, also known as Home Equity Conversion Mortgages, are insured by the government, the Federal Housing Administration will cover any shortfalls between the final loan balance and net proceeds from the sale. That means you don’t have to worry about being “underwater” on the loan in case the home’s value is less than the mortgaged amount…
…Although still little used, reverse mortgages can allow retirees with only modest savings but little or no housing debt to stay in their homes, while also providing a financial backstop for those concerned about outliving their retirement funds…
…For others, reverse mortgages can also bolster a cash buffer when a stock market swoon hobbles a retirement portfolio. Instead of selling stocks and funds when the market is down — which is often a better time to buy — people can tap home equity through a reverse mortgage line of credit to provide an income stream.
“People have peaks and troughs in demands for cash,” said Peter Bell, president of the National Reverse Mortgage Lenders Association, an industry trade group. “When they have peak demand, they may make poor decisions and cash in investments.”
Another reason older people may turn to a reverse mortgage is to finance the costs of long-term care.
Although a source of ready cash, reverse mortgages aren’t right for everyone. If you want to provide a bequest to your heirs by allowing them to sell your home upon your death, a reverse mortgage can wipe out much of the equity in your home. – The New York Times
Have you ever considered a reverse mortgage?