Monday, May 30, 2022

A Review of Reverse Mortgages



 


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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https://www.flickr.com/photos/miran/6951472582/sizes/l




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6 comments:

  1. Thanks for the overview, Tracey. I never did really understand how a reverse mortgage worked; just that a variety of commercials say things about it. Good to have a better background toward understanding it.

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  2. I've wondered about reverse mortgages. I would be interested in knowing what the situation is in Canada. The part you stated that you can get a reverse mortgage on the current mortgage has my ears perked - again, wondering if this is the case in Canada - also this part: "The good news is, if the home sells for less the balance of the loan, the estate is not liable to pay the difference!" (that's a perk for sure). Thanks so much for this information, I'm keen on knowing more about this for Canada, and you've prompted me to do further investigation. Very helpful. Thank you.

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  3. This is interesting, but as the mom of a financial planner, I would say in Canada, you have other options. Talk to someone who knows financial situations as everyone is different. But thank you for doing the hard part and showing us what this actually is! Many people have no idea that such a thing exists.

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  4. Thank you so much for providing this information! I have read a lot over the years about reverse mortgages and found the information somewhat convoluted. You have provided an easy to understand explanation and answered some very important questions. I did not know that the heirs got to keep anything, ever. I thought the bank got the house, period. I am now wondering how they define "good repair". This would be the focus of my concern when talking to a financial institution about a loan. For instance, if my roof or AC was 5 years old at the time of the loan, but 20 years old when payoff time arrived, would the bank then require a new roof/AC before the house would be considered in the condition at the time of the loan? Even though I am not considering a reverse mortgage, I do find it a very interesting conversation & consideration for the future.

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  5. I remember years ago hearing someone say that reverse mortgages are “for people who are bad at math.” I no longer remember what the logic behind his assertion was, but it made sense to me at the time. Your post has given me a different perspective to consider. Knowledge is power, and it likely behooves many of us who are getting up in years to learn more about the pros and cons of a reverse mortgage option.

    ReplyDelete
  6. Thank you for this clear, detailed and informative explanation of reverse mortgages. I think it is vital to read and learn as much as possible when considering any financial aspects and especially when it involves your home. Thank you for this review.

    ReplyDelete

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