Reverse Mortgage: How it Works, Its Benefits and Drawbacks
Igor Buces
A seniors reverse mortgage is different from a traditional home loan in several ways. Before applying for one, it's important for you to learn how they work and what are its main benefits and drawbacks.
In a reverse mortgage, you never make a mortgage payment while you live in your home. As a matter of fact, the opposite actually occurs: the bank pays you money. You can get the money from the bank in one of three different ways: lump sum, line of credit or monthly payments.
Because you are getting money from the bank, you increase your home's debt as time goes on. At the same time, the equity in the home decreases.
When your senior reverse mortgage becomes due - either because you move out of the house or you pass away - the debt in your home many be very large, and the equity very small. If you have received a lot of money from the loan, there may be no equity left at the end of the mortgage. However, you can never owe more money than your home is worth.
Since you don't make any monthly payments, you don't need to have a steady income to qualify. You can have no income and still qualify for a senior reverse mortgage. As a matter of fact, many seniors get this type of loan because it offers them a "second" income. In addition, your credit history is of no concern.
The only requirements you must fulfill are that you are 62 years old, you live in the house and that there is enough equity in the home.
The amount of money you can borrow depends on three factors:
Your age
The current market rate
Your home appraised value or the FHA's home mortgage limit for your area
In general, the older you are, the greater the appraised value of your home and the lower the present interest rates are, the more money you can borrow with a reverse mortgage.
Also, remember that since you will still be the owner of the home, you are still required to pay real estate taxes, insurance, and maintenance costs.
Reverse Mortgage Benefits
A reverse mortgage has many benefits associated with it. These are some of its most important ones:
You won't need to leave your home. You can stay living in your home for as long as you want.
You won't need any income to qualify. The lender is the making the payments.
You don't need to make any repayments on a reverse mortgage
You can't loose your home because you aren't able to make mortgage payments
You can never be thrown out of your home for as long as you stay living in it. However, you still need to make real estate, insurance and maintenance payments.
You can use the money from the reverse mortgage for any thing you want.
The funds are usually tax deductible
Most senior reverse mortgages have no income limitations
Your Social Security and Medicare payments are usually not affected (Depends on your individual situation.)
Reverse Mortgage Cons
As with any mortgage, reverse mortgages have some drawbacks associated to them. Some of these drawbacks are only potential and depending on a person's individual situation. Nevertheless, it's a good idea for you to learn about these drawbacks before choosing a seniors reverse mortgage.
These are a few things you want to consider before choosing a reverse mortgage:
Almost all reverse mortgages have variable interest rates. Your rates will change as the market changes.
Since reverse home mortgages work by decreasing your home equity, you can use up the majority of your home equity, leaving few funds left from the sale of the house for you and your heirs. However, a "non-recourse" clause ensures that you never owe more than the home is worth.
Since you keep ownership of the home, you are still responsible for real estate taxes, insurance and maintenance costs.
Most banks charge origination fees and closing costs. Most lenders also may charge servicing fees during the life of the mortgage. These fees are included in the loan.
The interest paid on a reverse mortgage is not deductible in your income tax returns until the home mortgage is paid off (in part or whole.)
There is usually a cheaper solution to your financial problems (refinancing, credit line, etc.)
To make sure you get a good deal, get a reverse mortgage using a trusted lender and a mortgage broker specializing in reverse mortgages. A good reverse mortgage broker will educate you throughout the process.
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