For many senior citizens, finding money necessary to supplement social security and other sources of income is a big concern. For those that own their homes, one option to raise cash would be to take out equity of their home. Since many seniors do not want to have to make a monthly payment, or sell their homes, a great option could be to take out a reverse mortgage.
What is a Reverse Mortgage?
A reverse mortgage is a loan that provides a borrower with equity from their homes. A lender will typically provide a loan up to 50% of the value of the home. The main difference between a reverse mortgage and traditional mortgage is that borrowers do not need to make monthly payments. Instead, the balance of the loan will increase over time as interest continues to accrue. The reverse mortgage will then be paid off when the home is sold, either by the estate or the homeowner.
How is it Funded?
When taking out a reverse mortgage, you will have two main options for receiving a loan, which are the lump sum and annuity options. With the lump sum option, you will receive one large check. With the annuity option you will receive a pre-determined monthly payment for a period of time. Most people end up choosing the annuity option as it provides consistent cash flow each month and can help to control interest expenses and charges.
Who Qualifies for a Reverse Mortgage?
In general, reverse mortgages are designed for senior citizens that need capital, but want to stay in their homes. In order to qualify for the loan, you will need to be at least 62 years old and the home with the lien will need to be your primary residence. Furthermore, the amount of loan proceeds that you can receive is also heavily dependent on your age. In general, the older you are, the more you will qualify for. The most that anyone will ever qualify for is a loan that will result in a current 50% LTV. Furthermore, you will need to have a sizable amount of equity in your home in order to qualify as the loan proceeds will first be used to pay off an existing mortgage or HELOC balance.
Risks of Reverse Mortgages?
While there are plenty of advantages that come with taking out a reverse mortgage, there are some risks that people need to be aware of first. The main risk is that they are expensive. Reverse mortgage rates tend to have higher interest rates than traditional mortgages and the fact that you are not actually making payments will lead to a quick accumulation of debt, which can quickly reduce your estate value. Because of this, and other risks, all borrowers are required to take a class to better understand reverse mortgages before they are approved.
