What is a Reverse Mortgage?
If you are over the age of 62 and have most of your net worth tied up in your home, but you don’t feel like moving yet and want to stay put in your home, then a reverse mortgage may be the right option for you. It is a loan that allows you to borrow on the equity of your home, without having to sell the property or take out a risky home equity line of credit. Once you no longer live in the property, it can be sold to pay the loan balance off to the bank.
A reverse mortgage is a great option to help you get money now without having to leave your home. But it isn’t the right choice for everyone. Let’s take a look at how a reverse mortgage works and why you may want to consider this for your needs.
To keep it simple, a reverse mortgage is a line of credit. When a homeowner is 62 years old and has a lot of equity in their home, they can choose to borrow against the value of the home, receiving those funds either in a line of credit, a fixed monthly payment, or a lump sum. Unlike a forward mortgage, which is what you used to purchase the home to start with, the homeowner will never need to make loan payments for the loan.
Instead of the homeowner making the payments, the entire loan balance becomes due and is payable when the borrower sells their home, moves away permanently, or when they die. When the home is sold, the amount of the reverse mortgage is paid over to the bank or financial institution that originally gave the money.
There are some federal regulations assigned to a reverse mortgage. For example, all lenders must structure the transaction so that the amount of the loan will not exceed the value of the home. Also, the borrower and their estate will never be responsible for paying the difference if the balance of the loan becomes more than the value of the home. This requires banks to be careful about which homes they will do reverse mortgages are. If the market value goes down too much, then they may not get their money back from the loan.
Reverse mortgages are nice because they will provide some cashflow to seniors who find most of their worth is tied up in their homes. They are complex and a little costly though so you may decide it is not worth your time. However, for those who qualify and decide to use this type of mortgage, they can get instant access to the equity of their home without the risks of a home equity loan and while still living in the home. Once they sell the home or pass on, the sale of the home will go to paying back the loan.
The Benefits of Getting a Reverse Mortgage
There are a lot of great benefits to working with a reverse mortgage, as long as you use it properly. Not everyone will choose to work with the option because it doesn’t work the best for them. But for others, it is a way to get rid of a traditional mortgage payment or get access to the equity of your home while you still live in and own the home. Some of the other benefits of working with a reverse mortgage include:
This type of mortgage is flexible, allowing you several methods to choose from based on your home, the product you choose, and more. Households who have a specific financial need can choose the right product to help provide relief in their finances. You can use this type of mortgage even without financial issues because it can become a good financial planning tool for you.
Stay In Your Home
You could sell your home and tap into the equity that is there. But then you have to leave your home and find somewhere new to live. If you work with a reverse mortgage, you will be able to live in the home for as long as you want, without having mortgage payments. You can use the money, in most situations, for any purpose you want. This provides you a comfortable home without moving and with lots of additional financial resources.
Low Risk of Default
Unlike what happens when you work on a home equity loan, this reverse mortgage will not take your home away from you for non-payment. You do not need to put payments on the loan at all until you are ready to permanently ready to leave the home. Keep in mind that you will still be responsible for the insurance, taxes, and upkeep on the home. Outside of that, the lenders of these mortgages will never have a claim on your income or other assets.
Since this type of mortgage is a loan, the money you receive from it is often tax-free. This is true whether you decide to turn this into a fixed-income that you earn a little bit each month or if you choose to take it as a lump sum all at once.
It is possible to use the funds that you receive from the reverse mortgage in any way that you would like. You can choose to use it for a rainy day in case something happens later, to pay for your children’s education, to pay for insurance, to go traveling, or even for day to day cost of living. There are no restrictions on how you can use this money.
Flexible Payment Options
You get to choose the type of loan that the reverse mortgage turns into. You can either get all of the loan money from it in a lump sum, credit line, or an annuity. No matter which one you pick, all of the money comes to you at once. You can also choose to work with an option that sends you the money each month or every other month, so you receive another source of income for as long as you remain in the home.
How Do I Qualify for a Reverse Mortgage?
Before you apply for a reverse mortgage, it is important to learn whether you qualify for this type of mortgage or not. Each bank may add additional qualifications based on what they like to see before approving the mortgage. The basic requirements for qualifying on this type of mortgage include:
- The youngest borrower on the title needs to be a minimum of 62 years old.
- The owners must use the home as their primary residence. If you use the property for rental income, you will not qualify.
- There must be enough equity in the home. The exact amount of equity will vary from one bank to another. The bank wants to make sure they will get their money back. And you will need to pay off your mortgage plus have some to live off later. The more equity that you have in the home, the better for you.
- All borrowers must meet financial criteria. These rules are established through the HUD.
If you do not meet all of these requirements, do not apply for the loan. Most banks will not work with you and this will just be a waste of your time. Instead, spend some time getting things in order and prepared so you can apply for a reverse mortgage later on.
What to Expect When Applying for a Reverse Mortgage?
When you are ready to apply for a reverse mortgage, there are a few steps that you need to undertake. First, you need to choose which financial company you would like to work with. Each one will have their special requirements you need to follow so take some time to do your research and pick out the right one for you.
Once you have narrowed down your choices, it is time to apply. You will need to feel out an application that will provide the bank with your name, contact information, information on your finances, information on the home you would like to do the reverse mortgage on, and your credit history.
Fill out the application completely, putting your best foot forward so the bank is more likely to offer you the reverse mortgage. You will likely need to provide proof and documentation of all statements you make about the property and your financial history. If the financial institution asks you for additional materials, submitting them promptly will help the process go smoothly.
Hopefully, you looked to see what qualifications you needed to meet before you start. This will help the process go well and can prevent any heartache later on because you don’t meet the minimum requirements. While there are other reasons the bank may choose to deny your application, if you do not meet their minimum requirements, they will deny it before you get any further in the process.
Which Banks and Institutions Specialize in Reverse Mortgages?
When you are ready to apply for a reverse mortgage, it is best to choose a bank or other financial institution with the right experience to get this done. They can walk you through the process and ensure that you receive the care and attention necessary. Some of the best banks and institutions to consider for your reverse mortgage includes:
- Quontic Bank
- M&T Bank
- The Federal Savings Bank
- Goldwater Bank
- Resolute Bank
In the past, Wells Fargo and Bank of America were two of the big names in reverse mortgages. In 2011, both of these banks announced that they would no longer offer reverse mortgages to potential customers in the future. You can also check with your local bank to see whether they offer some reverse mortgage options to help you.
Are There Any Downfalls to Reverse Mortgages?
There are a lot of benefits to choosing a reverse mortgage. However, there are times when you may want to hold off and not get this kind of mortgage at all. Some of the downfalls that come with a reverse mortgage include:
- High upfront costs: Lenders can make money on a reverse mortgage in the same way they do with a conventional mortgage. They do this by charging a lot of fees upfront for interest, points, origination, and more. You need to weigh the costs of doing this before jumping right in and see if it makes sense for your financial situation.
- Mortgage Insurance: Even though there is no worry about defaulting with a reverse mortgage, many banks will require mortgage insurance to help mitigate some of the risks the lender takes on, such as the home losing value.
- Other fees: The borrower of a reverse mortgage will still be responsible for all of the repair and maintenance costs on the home, the upkeep, the homeowner’s insurance, and taxes. These costs will not go away when you get a reverse mortgage.
- Need to have a high amount of equity: To even qualify for this mortgage, there needs to be a substantial amount of equity in your home. While applying, a lender will offer a percentage of the value of the home, based on your age and the program. When you do this mortgage, it needs to pay off any existing mortgage that is on the property. If your home doesn’t have enough equity, you may not qualify.
- Products are complex: A reverse mortgage may sound simple, but it is not always a suitable option for every homeowner. You need to look through the paperwork carefully to help make informed decisions. Learn how payments are made, how costs are charged, and all the other rules you will need to follow.
There are a lot of benefits to getting a reverse mortgage and many homeowners decide that it is the right choice for them. It is important to understand how these reverse mortgages work and do your research to see if they work well for your needs or not. They can be wonderful financial tools for many, but this doesn’t make them the right choice for everyone. Talk with a lender and explore your options so you are well informed if a reverse mortgage will work for you.