If you are like me, you have probably heard the term "Reverse Mortgage" and wondered what that was and how it worked. I heard snippets of information from commercials, but I never really understood how reverse mortgages work, or had enough information to decide if they were a good or a bad thing. So I decided to do some research and educate myself on the subject.
What Is A Reverse Mortgage?
A loan for people over the age of 62 that own their home or are in the process of paying back a mortgage on the home they live in. The collateral for this load is the home itself and the equity the owners have built up in it.
Do You Have to Pay it Back?
We all know there is no such thing as a free lunch, so you do have to pay back a reverse mortgage. But this loan does not have to be paid back until the last surviving homeowner either:
- Passes away
- Moves out
- Does not live in the home as a primary residence for over 12 months
When any of these three things happen, the estate of the homeowner has to repay the loan, in full, within 6 months, or sell the house to repay the loan. The good news is, if the home sells for less the balance of the loan, the estate is not liable to pay the difference! The lending institution takes the loss. If the house sells for more than the balance of the loan, the estate keeps the difference. One of the few win/win situations you will ever see in finance!
What If I Already Have a Mortgage On My Home?
This is not a problem and will not prevent you from applying for a reverse mortgage. You can take out a reverse mortgage and pay off your mortgage, to get rid of that payment every month. If you qualify for a reverse mortgage that is more than what you owe, you then have access to the rest of the loan amount.
How Much Money Can I Get?
How much the loan will be for depends of a few things:
- Age of the homeowner
- Current interest rate
- Value of the house
- Government loan limits
How Will I Get My Money?
There are several ways to receive the proceeds from a reverse mortgage:
- Equal monthly payments for a fixed amount of time or for as long as the owners live in the home.
- Lump sum of money, all at once
- Line of credit that the homeowner can draw on as needed.
You may also get a combination of any of the above, like a lump sum of a certain amount and the rest monthly, or a lump sum in the beginning and then a line of credit. The terms of a reverse mortgage are extremely flexible.
Can I Outlive My Reverse Mortgage?
A mortgage of this type is not due as long as the homeowner lives there as their primary residence and maintains the home, no matter how long they live. You cannot outlive a reverse mortgage.
Do I Have Any Obligations During the Tenure of the Loan?
You must maintain the home in good working order, keep it insured to value and keep the taxes current. In other words, simply do the things you probably already do. The house must be kept in good repair, insured and you must pay the taxes. That's all.
Whether or not a reverse mortgage is a good idea for you is something that only you can decide. The best way to make a decision is to get all the information you can and this article is only a short outline of the basic facts. It also does not take into consideration that laws differ from state to state and country to country. If you are considering a reverse mortgage, please make sure to get all the information regarding the laws in your area.*
*This article is for informational purposes only and is not meant to provide legal advice or information on which to base any financial decision. The writer is not liable for the result of actions taken from reading this article.
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