A reverse mortgage is a home equity loan for senior homeowners. Usually aged 62 or above. This loan involves no monthly installments and is paid back when the borrower passes away or sells the house.To understand how does a reverse mortgage work, give this article a solid read.
How a Does Reverse Mortgage Work – Understanding
A reverse mortgage works opposite to a traditional mortgage.
Traditional mortgages require the borrower to pay the debt in monthly payments. On the other hand, reverse mortgage increases over time as it does not require monthly installments. It is only paid back when the homeowner passes away or sells the house.
Furthermore, the life expectancy of the borrower plays a huge role in how much reverse mortgage he is likely to receive. In general, the older the age, higher the home equity, hence the more amount is granted.
What Are The Eligibility Requirements For A Reverse Mortgage?
To qualify for a reverse mortgage program, following conditions must be fulfilled:
- The reverse mortgage program is mainly designed for senior homeowners. Only those who are 62 or above can apply for the loan.
- The eligibility criteria of reverse mortgage also require you to own a personal home.
- As the goal of a reverse mortgage is to help seniors to stay home, borrowers are required to use their home as a primary residence and cannot live anywhere else for 12 months straight.
- Counseling with the HUD-approved agency is a must. There are several HUD-approved bodies and finding one for counseling shouldn’t be a big deal. The purpose of this condition is to make sure that you are aware of all your options.
Home Qualification Requirements:
To understand how does a reverse mortgage work, you must also know the requirements for home qualifications. These requirements include:
- Borrower’s home must be a single-family home
- If it’s a multifamily home, it should not contain more than four units.
- Out of those four units, one must be occupied by the borrower
- A condominium is only allowed if its HUD-approved
- The home must meet FHA requirements
The homes that do not qualify for a reverse mortgage are vacation homes and secondary homes as these are not considered the primary residence of a borrower.
How Does a Reverse Mortgage Work When You Die?
If the home title belonged to a couple, then the surviving partner may remain in the house. Otherwise, the responsibility of mortgage payment falls on the shoulders of the spouse or the heir.
The following options will help you get a clear idea about how does a reverse mortgage work when the borrower dies.
- The beneficiary will receive a letter from the loan providers, asking what your intentions about paying back the mortgage are.
- Answer the letter and stay in touch with the loan servicer
- If you plan on keeping the home, you must pay the loan.
- If you don’t want the home, you will be required to sign a deed-in-lieu foreclosure and give the house to the lender.
Is A Reverse Mortgage A Good Idea – Pros And Cons Of Reverse Mortgage?
Most senior homeowners nowadays seem to be asking the same questions.
Is a reverse mortgage a good idea? Will I lose my home if a get a reverse mortgage? Will the bank be the title of my property, etc?
These are all legitimate questions and may pop up into anyone’s mind looking to get a reverse mortgage. To answer these questions, here is a list of reverse mortgage advantages and disadvantages.
Reverse Mortgage Advantages:
- The federal government guarantees the tax-free income, as long as you use your current home as a primary residence.
- Change of plan is easy. It can be changed at any time from monthly checks to line of credit, cash out or a combination of all three.
- No health, income or credit qualifications
- Designed for senior homeowners to make their retirement days comfortable.
- A great loan option for senior citizens who want to live in familiar surroundings or have spent years at a place and don’t want to move out.
- Reverse mortgages satisfy your debts by transferring your debts/mortgages to the reverse mortgage balance.
- These mortgages involve no out of pocket costs. Only appraisal fees and counseling from an HUD-approved organization is what you are supposed to pay for. In some cases, these fees are waived.
- Remain in your home for a lifetime. Just pay your homeowner’s insurance and real estate taxes, and you will never be forced out of the property.
- Reverse mortgages also allow your heirs to avoid a decent amount of real estate tax.
- A reverse mortgage can be refinanced as many times as you want as long as there is remaining equity in your home.
- After your passing, your heirs can claim the interest on your mortgage.
Reverse Mortgage Disadvantages:
Some of the major disadvantages that may come with a reverse mortgage are:
- The reverse mortgage closing costs are higher than those of traditional mortgage.
- Since you are not supposed to pay monthly installments of a reverse mortgage, the debt is always rising. It ultimately results in the reduced inheritance for your children.
- A reverse mortgage is not considered to be a good program for short term.
- You are not allowed to spend 12 consecutive months away from your primary residence.
- Failing to pay real estate taxes results in repayment of the debt
- After your passing, the heirs may sell the property and keep the remaining equity. However, the whole debt must be paid to maintain the property.
These are some of the advantages, disadvantages and guidelines about how does a reverse mortgage work and how can you qualify for the loan program for senior homeowners. Although this loan has some cons that might scare you away, the pros are of much bigger significance. The mortgage helps you spend retired life in the surroundings where you made memories and spent the best of moments of your life. Do not hesitate. Go ahead and choose the plan that suits you best and your family.
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