What is a reverse mortgage?
Curious about how a reverse mortgage works?
More and more people of qualifying age (55 or older) are utilizing reverse mortgages or at a point where they are considering one.
The very term “reverse” mortgage raises questions with anyone who’s hearing it for the first time. How does “reverse” describe this particular mortgage instrument?
As I am not a reverse mortgage specialist or any kind of mortgage specialist, (I’m a realtor), I thought it might be helpful to hear about them from me, a person who has no vested interest in promoting the reverse mortgage.
As a realtor, I simply want to inform clients and the public at large about the tools they have available to them, that may best fit their particular circumstances. In addition, I have many experiences with clients who have either been selling a home with a reverse mortgage lien on their home or who have utilized it for purchasing a home.
So, in this article I’ll talk about two things. First, what a reverse mortgage is and how it operates. Second, what things to be aware of when choosing a reverse mortgage. And here, I’ll state my disclaimer. I’m not a reverse mortgage representative and the examples and insights following are not to be construed as professional advice about mortgages.
What is a reverse mortgage?
A reverse mortgage is a lien upon a home, just as any mortgage is a lien upon a property. A few basic qualifications are that the person obtaining the mortgage must own the home (you don’t need to own free and clear) The person must live in the home as that person’s principal residence. The person must be 55 or older.
The person may take up to 50% of their home’s value in a reverse mortgage. An example, your home is valued (by an appraisal) at $700,000. You still owe $100,000 on your current mortgage. Your current mortgage will now be wrapped into the new reverse mortgage. So you will have available to you up to $250,000. This is the amount available because $350,000 is 50% of $700,000 and the previous loan still owed is $100,000
The homeowner can take that money in one lump sum or can take it in monthly payments of their choosing. So, let’s say you take $2,000 a month. Interest begins accruing on the $2,000. The following month, interest is not accruing on $4,000, and so on.
Here’s the perk of the reverse mortgage, you need make no payments, ever ! There is no monthly mortgage payment !
The person lives comfortably in their home with no payments. Money continues to come to the homeowner every month, in this scenario. The loan need never be paid on until the homeowner sells the home or the homeowner dies. And, the home must be sold within six months of the homeowner’s death. (Extension of time may be applied for) No relative can move into the home indefinitely. The reverse mortgage company must be notified upon the homeowner’s death. In this scenario, the heirs, upon sale of the home will inherit whatever equity remains on the home. Say, the homeowner (the person who took the loan) accrued the full $350,000 on the loan. The family has $350,000 of equity remaining.
It behooves the family to sell the home in a timely manner, as interest continues accruing on the amount owed.
A reverse mortgage may be a good tool for an individual or couple to use the equity of their home for more immediate financial freedom. An individual or couple may wish to stay in their home instead of moving to assisted living. Monthly payments from the reverse mortgage can cover cost of caretakers or other outside assistance. There is, however, no requirements as to how the money must be used. It can be used for home improvements or personal purposes. The reverse mortgage company simply needs to determine current market value of the home through an appraisal.
Some people believe, erroneously, that the reverse mortgage company takes the title to the home. This is not true. Like any lien holder (mortgagor) of a property, the lien holder must be paid the total amount owed when the home is sold. As noted above, legal heirs receive the remaining equity upon the successful sale of the home.
This last point brings me to another point. In all cases, whether, reverse mortgage, regular mortgage or no mortgage, it’s always a good idea for homeowners to have their homes and other assets in a trust. It’s the legal work of determining who legal heirs are that eats into the heirs inheritance. A trust has already done this work and so protects the inheritance from court costs.
I hope this information has been helpful and clear, but if further questions remain about reverse mortgages, please call or email me
