Doing research regarding how to tap into your home's equity may result in asking this question: "How does a reverse mortgage work?" Reverse mortgages aren't necessarily complicated, but you certainly don't want to jump into a financial situation which you don't completely understand.
Reverse Mortgage Details
A reverse mortgage is comparable to an equity loan, or a cash-out refinance, but the difference is that the money you receive from the reverse mortgage does not result in monthly payments. Essentially, you are tapping into your equity to receive money that you can use any way you want. Borrowers can use reverse mortgages as income sources, allowing them to receive money in retirement and perhaps enabling them to avoid going back to work out of financial necessity.
Reverse Mortgage Eligibility
Reverse mortgages are available to people over the age of 62 in the United States. Other countries offer similar products under different names, and the eligibility for these products varies from the qualifications in the States. The basic requirements for reverse mortgages in the United States include:
- Borrower must be age 62 or older.
- Borrower should use the home as a primary residence.
- Every owner on the home (for example, husband and wife) must apply for the loan.
- Every owner must also be eligible for the reverse mortgage.
- The existing mortgage must either be paid off, or low enough to where the reverse mortgage can pay off the remaining balance.
Since there are different reverse mortgage products available, the requirements may differ from product to product. While some reverse mortgage loan products allow for multi-unit dwellings, other products only accept single family primary residences.
How Does a Reverse Mortgage Work?
There is plenty of information available regarding reverse mortgages online, but you may still wonder, "How does a reverse mortgage work?" The equity in your home is where the money comes from for the reverse mortgage. You have options regarding how you would like the funds disbursed:
- In one large lump sum
- In monthly payments
- As a credit line that you use at your discretion
- Any combination of these
The money is yours to do with as you please. You are not expected to make payments on the reverse mortgage as long as you use the home as your primary residence. If you move from this home, the mortgage is immediately due. The loan is also payable upon the death of all borrowers. In other words, if a husband and wife take out a reverse mortgage and the husband dies, the wife does not have to pay the mortgage loan. It will come due upon her death.
If you are wondering how a loan can become due after a borrower's death, it is actually quite simple. The lender owns the equity on the home, and takes the money owed from that. Any remaining money is disbursed to the deceased borrower's estate, which is used to pay any remaining creditors and also as inheritance to specified heirs.
What You Need to Know
Two important items which are not made clear in many of the articles regarding reverse mortgages are:
- Property taxes and insurance payments are still your responsibility. If you do not pay these items as scheduled, you may be considered in default of the loan. This will result in the reverse mortgage immediately coming due.
- Reverse mortgages have closing costs. Closing costs for reverse mortgages can be notoriously high, so it is important to crunch the numbers to make sure the loan makes sense financially.
A reverse mortgage is not a magical program which gives seniors free money that they never have to worry about paying back. These mortgages can be great for seniors who find themselves in the situation of being "House Rich/Cash Poor," or in other words, they have plenty of equity in their home but not much income on a monthly basis. Make sure that you fully understand the terms of a reverse mortgage loan before you move forward with an application.
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