- Borrow money against your home with no monthly payments to the lender
- Never owe more than the value of your home
- A good solution if you are house rich and cash poor
Learn About Reverse Mortgages And Whether They Could Work For You
With the exception of a recent major hiccup, the last 40 years have seen strong growth in the value of America’s housing stock. As a result, many people who have been living in their homes for a long time have had the opportunity to build up a lot of equity in their homes. For many retirees with little savings and only modest sources of income, this home equity can be a very significant portion of their net worth. Various ways exist to tap into this wealth, including home equity lines and loans and mortgage refinancing, but these can be hard to qualify for if you have a low income and you must make monthly payments. For older Americans, there is another option that is growing in popularity: the Reverse Mortgage. But do you know what it is, and do you know how it works? This article gives a high-level summary, but to really do your research, visit the Bills.com reverse mortgage resource center.
What is a Reverse Mortgage?
A reverse mortgage is a loan product that allows homeowners 62 years of age and older to use their home equity to borrow a lump sum or generate tax-free monthly income, without having to sell their home or take on additional monthly payments. A reverse mortgage is, in many ways, exactly that — the reverse of a standard mortgage. With a standard mortgage, the borrower (or homeowner) makes monthly payments to the lender (or bank or mortgage company), in order to pay back an amount the lender originally loaned for the purchase or refinance of the house. These payments include interest that the lender charges the borrower for the loan. In a reverse mortgage, the situation can be reversed; it is the lender that makes monthly payments to the borrower. In both a standard and reverse mortgage, the lender secures its loan amount by using the house as collateral.
How much can I borrow?
A few factors are most significant in determining how much money a borrower will receive from a reverse mortgage, such as:
- The value of the home (higher value => higher possible loan)
- The borrower’s (and co-borrower’s) age (older people can borrow more)
- Current interest rates (you can borrow more if interest rates are low)
- Lending limits determined by your geographic area
Homeowners can choose to borrow a lump sum to meet an immediate need, can choose to take a monthly income either for a fixed period (term) or until they no longer occupy the house (tenure), or can set up a line of credit that they can draw from as they need the funds. The line of credit is the most popular option, with nearly 60% of reverse mortgage borrowers choosing it.
Once any existing mortgage on the home has been paid off (this is mandatory), the proceeds from a reverse mortgage can be used for anything, completely at the discretion of the borrower. Many borrowers use the funds for home repairs or modifications, for health care expenses or to settle other debts. 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.
How Exactly Does a Reverse Mortgage Work?
No monthly payments are due on the amount borrowed, although interest charges accumulate on the loan. The loan must be repaid when the owner(s) move or sell the home, when they pass away, or when 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.
Who Should Consider a Reverse Mortgage?
Because there are large up-front fees involved and because a reverse mortgage does erode the value you will pass to your heirs it is certainly wise to work out if any other options could meet your needs, such as:
- Selling your home and using the proceeds to meet your needs, then renting
- Downsizing and use the difference
- Using an internal family loan
- Having someone share your home and pay you rent
Of course, each of these options has its own costs (selling a house and buying a new one typically involves at least 6% in real estate agent commissions, for example) and benefits.
Thinking About a Reverse Mortgage?
One very important facet of the reverse mortgage process is that borrowers contemplating a reverse mortgage must participate in consumer counseling to ensure they understand their options. 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 all of the implications of the new mortgage with you, and to discuss your potential options. To find a reputable lender and arrange a counseling appointment, we recommend getting a reverse mortgage quote from Bills.com’s network of pre-screened lenders.
Overall, for older Americans contemplating a stress-free retirement, the reverse mortgage may be the right option! Just make sure that you know your options and goals, and that you understand how a reverse mortgage works.
Norfolk, VA | June 01, 2011
June 01, 2011
In order to obtain a reverse mortgage:
- You need to have substantial equity in your home, usually at least a 50% equity stake.
- The youngest borrower on the reverse mortgage must be at least 62.
- The home must be your primary residence
Make sure to look into the newer HECM Saver Reverse Mortgage, as well as the standard Reverse Mortgage, in order to find the best product for your individual needs and situation. The HECM Saver Reverse Mortgage has lower costs.
Lowry Crossing, TX | December 15, 2010
December 15, 2010
If you do not create an estate plan, a reverse mortgage on the property may be a disaster for your child. Why? The reverse mortgage must be repaid upon the homeowners death. If the homeowner has no heirs, then this is not a problem because the estate's executor or administrator simply sells the home to repay the loan. In your case however, you need a plan in place to repay the loan if you want your child to inherit the property. Again, see a wills, trusts, and estates attorney before you execute a reverse mortgage.
Del Rey Oaks, CA | December 03, 2010
December 06, 2010
Since you don't have facebook, please provide us with your location and a valid email address so we can answer it. Without a valid email address,we can't reply. (Go back to login with Facebook)
Due to the high volume of comments received, we cannot publish and/or respond to every comment received. If you have a specific question, we recommend you search our site for an answer before commenting.
* Bills.com will not share, sell, lend, or make public your e-mail address. We reserve the right to delete any questions or comments that violate the Bills.com terms of service.
We get a lot of comments! To help us show our boss that this is a valuable service, so we can keep providing it, we ask you to do 2 things before commmenting:
Log in
Like us
Submit your comment!
Due to the high volume of comments received, we cannot publish and/or respond to every comment received. If you have a specific question, we recommend you search our site for an answer before commenting.
* Bills.com will not share, sell, lend, or make public your e-mail address. We reserve the right to delete any questions or comments that violate the Bills.com terms of service.
Thank you for your comment. Your comment will be posted shortly.
Comments (6)