You probably know that a Reverse Mortgage uses your home’s equity as collateral. You have been living at your home for quite some time, so you know you would qualify for a good amount that would serve you well at this point in your life. However, you have your doubts. Your home is the largest asset you own and you don’t want to do anything to put it at risk. But wait, if you take out a reverse mortgage, would you be incurring a risk? Let’s review the scenario and get some questions answered.
Why not simply get a Home Equity Loan?
Generally, a Home Equity Loan has strict requirements regarding income and creditworthiness. Also you must make monthly payments to repay the loan. In contrast, in the case of a reverse mortgage the amount that can be borrowed is determined by using a formula that takes into account current interest rates and the appraised value of the property in question. No monthly payments need to be made as long as you live in the home and keep up the payments of property taxes, insurance and maintenance.
Who qualifies for a reverse mortgage?
The Federal Housing Administration specifies that all homeowners need to be at least 62 years old to qualify. Also, the home must be completely paid up or you may use some of the money to pay it off. There are no credit scores required for this transaction.
How much money can you get?
There are four factors that determine the amount you are eligible to receive:
- Owners’ age – in this case, the older the better!
- Appraised value of the property
- Current interest rate
- Government imposed lending limits
Do you need to receive the money all at once?
In this case, the answer is no. You can choose between a lump sum at closing, receiving monthly payments as long as you live in the home, getting payments during a certain number of years, a line of credit from which you can draw at any time until the credit is exhausted or a combination of the above.
When do you have to start paying it back?
As long as at least one of the property owners continues to live full-time in that property and continues to make the necessary payments (mainly taxes and insurance), the mortgage does not become due.
What happens after the homeowners pass away?
In this case, the estate can decide whether to repay the mortgage or put the home up for sale. If the equity in the home is higher than the balance of the loan when the home is sold to repay the loan, the remaining equity belongs to the estate. No assets are affected by a reverse mortgage, no investments, other properties, car or valuables can be taken to pay off the reverse mortgage.
Are there any factors you should consider before getting a reverse mortgage?
Definitely! Before signing on the dotted line, talk to your lender about the fees associated with this type of mortgage. They may be too high for your comfort. Also, take into account the fact that, in general terms, the interest rate on a reverse mortgage is higher than that of a traditional home equity loan. Make sure you understand the costs associated with the loan before committing to it.
Remember you do not have to repay the loan as long as you keep the property as your primary residence. What happens if you have to move out, say, to a long term care facility? You will have to start repaying the mortgage at a time when money might be tight.
Finally, there is the subject of inheritance. If this home has been in your family for decades and you dream about your children living there after you die, you can forget about that dream if you have a reverse mortgage. As mentioned above, the house needs to be sold to repay the mortgage. If this is your wish, a reverse mortgage might not be for you.
