Have you been curious about how a reverse mortgage loan works? Reverse mortgages are a boon for people that have lived in their home since a long time. Over the past 30 years average home prices have increased vastlyand in many cases almost doubled in value over the last 10 years. As a result, many homeowners now own valuable equity in their homes and have many different options to use that hard earned home equity. The most common use of home equity is via home equity loans and mortgage refinances. Howeverm for senior Americans, there is another, less common option that is growing in popularity as home prices have increased and baby boomers have moved closer to retirement age: the reverse mortgage.
So how does a reverse mortgage work? A reverse mortgage is a financial loan product that allows homeowners 62 years of age and older to use their home equity to generate tax free income, without having to sell the home or take on a new mortgage payment. The reverse mortgage is precisely what the title states, the reverse of a regular mortgage. With a standard mortgage, the borrower/homeowner makes monthly payments to the lender, in order to pay back the loan that the lender originally lent to for the purchase or refinance of the house.
This payment includes interest that the lender charges the borrower for the loan. In a reverse mortgage, the situation is totally reversed; and the lender makes monthly payments to the borrower. It must be noted that, in both a standard and reverse mortgage, the lender secures their loan amount by using the house as collateral.
There are some important factors that determine how much money a borrower will receive from a reverse mortgage. These include the value of the home, the borrower (and co-borrower’s) age, the current existing interest rates and any lending limits that may be standard for your geographic area. As a base rule of thumb, the older the borrower and the more valuable the home, the larger the available loan amount. Home owners can easily choose how they want to receive their payments, either as a lump sum, monthly payments or as a line of credit. The line of credit is the most popular option, with nearly 60% of reverse mortgage borrowers choosing to the option to draw income or a lump sum off the line at the time of their choosing. And the proceeds from the reverse mortgage can be used for anything, completely at the discretion of the borrower, though most borrowers use the funds for home repairs or modifications, health care expenses, to settle other debts, or for their long-planned vacation! Reverse mortgages are available for nearly all property types with the exception of co-ops, though co-op owners in some metropolitan areas, specifically New York, should have local options. If you are in retirement, or nearing retirement, reverse mortgages can be a great source of income.
For reverse mortgage borrowers with an existing mortgage, that mortgage will need to be paid off completely, so that the new reverse mortgage will be the only lien on the house. If the proceeds from the reverse mortgage are not ample to pay off the existing mortgage, the borrower will need to access savings or other sources to pay off the rest of existing mortgage amount. In this scenario, the borrower won’t have access to any additional funds from the reverse mortgage; however, they will no longer have a mortgage payment! The more common scenario is one in which there is a small or no mortgage on the home and then the borrower is able to access nearly the full amount of the reverse mortgage to use at their discretion. No monthly payments are due on the loan and the loan is repaid when the moves or sells the home, passes away, or ownership otherwise changes hands. If the home is sold and the proceeds of the sale exceed the mortgage amount, the balance belongs to the borrower or their heirs.
One very important facet of the reverse mortgage process is the consumer counseling that is required for borrowers contemplating a reverse mortgage. Your lender can help you find counseling agencies and most programs are approved and monitored by HUD and/ or AARP. The counseling is required to make sure that the terms and risks of the program are clear to you. Counselors are obligated by law to review with you all of the implications of the new mortgage, and what your potential options are.
In summary, for older Americans contemplating a hassle free retirement, a reverse mortgage may be just the right option. Just make sure that you know your options and goals and how a reverse mortgage works.
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