A reverse mortgage is a loan type that allows homeowners 62 years old or older, usually those already paying down a mortgage, to borrow part of the equity in the house as tax-free income. In fact, like one of those loans, reverse mortgages can offer either a lump sum or a line of credit you can tap when needed, depending on how much you have paid down in your home and the market value of your home. A reverse mortgage loan, just like a traditional mortgage, allows homeowners to borrow money using their home as collateral.
Just as a traditional mortgage, borrowers of reverse mortgages are required to stay current with property-related taxes, insurance, and maintenance as part of ongoing loan obligations. With a reverse mortgage, instead of receiving one lump sum to pay off in perpetuity, a homeowner generally receives regular payments from a lender, which becomes a mortgage. With a typical forward mortgage, borrowers receive a lump sum of money from a lender, and then they pay a monthly amount toward paying off that lump sum, including interest.
Instead of making monthly mortgage payments, however, one gets a loan against part of ones equity in a house. When you have a conventional mortgage, you are paying a lender each month for a period of time that you use to purchase the house.
As mentioned earlier, you actually do have the ability to pay regular payments on your loan, but repayment is not required until you sell the house, stop living in it, or die. Either way, loan repayment is not required until you have passed or moved out of your home. If you fail to pay your property taxes, keep homeowners insurance, or keep the home in good repair, your lender may demand that you pay back your loan.
Repayment of a loan is required when the last remaining borrowers either vacate a home for good, or do not keep property taxes and homeowners insurance. The loan and interest are repaid only if you sell your home, permanently move out, or die. When the loan is paid off, any remaining equity is passed on to your heirs, or as dictated by your will or trust.
At this point, a borrower (or his heirs) may repay most reverse mortgage loans and keep the house, or they may sell the house and use the proceeds to pay off the loan, with the seller keeping whatever proceeds are left over when the loan is paid off. The homeowners or heirs of homeowners eventually must pay off reverse mortgage loans, typically by selling the home. The lender must also give each heir a few months to decide if they would like to repay the reverse mortgage loan, or let the lender sell your house in order to repay the loan.
Homeowners who choose this type of mortgage have no monthly payments and are not required to sell the house (in other words, they are free to keep living in it), but the loan is required to be paid back when the borrower dies, moves permanently away, or sells the house. Payments on the loan are not required to be made until after a borrower moves, sells, or dies. A reverse mortgage is paid off when the borrower dies, lives out of the home for over 12 months, sells the property, or stops paying taxes and homeowners insurance.
Instead, homeowners may only take out loans on part of their homes equity. The amount that you can borrow through a reverse mortgage depends on what kind of reverse mortgage you choose, how old the youngest borrower is, the current interest rates, and how much your house is worth. The amount you will be able to borrow with a reverse mortgage depends on many factors, like the current market value of the home, your age, current interest rates, the type of reverse mortgage, associated costs, and your own financial evaluation, according to Jackie Boies.
Reverse mortgages can help homeowners looking for extra income in retirement years, with many using the funds to supplement Social Security or other income, cover medical expenses, pay for home maintenance and home improvements, says Jackie Boies. While pawnbrokers reverse mortgages may be the easiest to obtain and the fastest to finance, they are also known to attract unscrupulous professionals who use reverse mortgages as a way to cheat unsuspecting seniors out of the equity in their properties. A reverse mortgage is the only way to access equity in the home without selling the house to seniors who do not want to take on the responsibility of making the monthly loan payments, or cannot qualify for a home equity loan or refinance due to limited cash flow or bad credit.
Warning signs Cut the signs Some lenders misunderstand how reverse mortgages work and fail to explain the fine print to their clients A contractor trying to convince a homeowner that the best way to pay for expensive home repairs is to get a reverse mortgage Some companies market aggressively to older adults, who might not have the financial knowledge to understand the implications of taking on a new loan such as this One company is misleading homeowners into investing loan proceeds in risky stocks or schemes such as house flipping, or to sign the money over to a third party. Some mortgage advertisements falsely promise veterans special deals, implicate VA approval, or offer reverse mortgages with no payments, in order to lure older Americans desperate to remain in their homes. Relatives, caregivers, and financial advisers also took advantage of seniors, using a power of attorney to reverse mortgage the home, then stealing the proceeds, or convincing them to purchase a financial product, like an annuity or a life insurance policy, that a senior could afford only if they obtained a reverse mortgage.
If an eligible surviving non-mortgagor spouse lives on the property at the time of the borrowers death and is able to obtain, within 90 calendar days after the borrowers death, good marketable title to the property, the lender/servicer must notify them of its intent to terminate the loan and allow the eligible surviving non-mortgagor spouse 120 calendar days to satisfy the terms of the reverse mortgage loan and keep the subject property for the lesser of the outstanding principal balance or 95% of the appraised value of the property.