Reverse mortgages have been gaining in popularity since about 1988, and many seniors have found them to be an excellent tool to meet their retirement needs. Although they are not for everyone, it may be the instrument you need to provide you with a cash flow and enable you to keep on living in your current home.
How a Reverse Mortgage Works:
A reverse mortgage works just like its name suggests – the opposite of a traditional mortgage. Instead of you paying a lender, the lender pays you. Also, instead of the lender telling you how much to pay, you tell them how much you want and how you want it.
Depending on how much money you have built up in the equity of your home, you will be able to choose to get access to your cash in one of three ways. You can select a lump sum amount, monthly payments, a line of credit, or some kind of combination of these options. Most people choose a combination.
The Requirements for a Reverse Mortgage
It is much easier to qualify for a reverse mortgage than a traditional one. The main reason is that you do not make any payments on the mortgage while you are living in the home, so it does not matter if you have an income or not. There really are only two requirements: all people to be named on the reverse mortgage must be at least 62 years old, and there must be more money in equity than what is still owed on the home.
When a reverse mortgage is issued, the lender pays off the existing mortgage out of the equity, and then the balance is available. Only a portion of the remaining cash is available to be used as a cash flow, however, because there are costs and some interest will also be set aside.
The Availability of Cash
A reverse mortgage will provide more money per month if the applicants wait a few years. The longer the time period for payouts to be made, the less money that can be given per month. This is why it may be a good idea to not apply as soon as you reach 62.
Interest Rates on a Reverse Mortgage
In a reverse mortgage, the interest rates are typically higher than that for a traditional mortgage. The main reason is that no money is paid until the home is no longer needed, which means that the interest accumulates faster over time.
Some reverse mortgages, such as Home Equity Conversion Mortgages (HECM’s), are guaranteed by the government (HUD), to not become more costly than the home is worth. A reverse mortgage offered by a private lender may not have this guarantee.
Precautions Offered on Reverse Mortgages
In order to get a government approved FHA HECM, financial counseling will be required in order to ensure that reverse mortgages are clearly understood. This helps to make sure that there is no pressure to get one, and it will also help to ensure that the issuer is not deceiving.
Once a reverse mortgage is obtained, the home may be lived in as long as it is needed by anyone whose name is on the mortgage. The home has to be maintained, however, and taxes and insurance must also be kept in place.