Retirement Living- Everything You Need to Know About Reverse Mortgages
I think you’ll agree with me when I say…
Trying to figure out how a reverse mortgage works is one of the most daunting tasks you will ever undertake, considering the number of hours you have to spend nose-deep in research, and the amount of money spent on expert consultations.
Well, lucky for you, you don’t have to go through the tiring research routine and bank-breaking consultations.
Here is a comprehensive and straightforward guide that features the most important reverse mortgage facts to help you understand what it is, how it works and the criteria.
What Is A Reverse Mortgage?
Let’s go back a decade before reverse mortgages came to light when homeowners had only two ways to get their cash from their homes: either via selling their estates and moving to an entirely new neighbourhood or by borrowing against it which would, without a doubt, require them to pay regular monthly payments.
Now, with reverse mortgages, you don’t have to decide between moving and making regular loan repayments.
Let’s start with the basics:
A reverse mortgage is an equity-based loan, which involves a homeowner or a proprietor taking out credit based upon the equity in their property.
For instance, if you have already cleared your mortgage on your estate with a market value of about £250,000, then you have equity, in theory though, of £250,000 and you can take out a reverse mortgage loan for that amount. You will not have to pay back this loan, as long as you live in the estate as your primary residence, continue paying your taxes and insurance and keep up with the home maintenance.
However, when you bid farewell to the world, the loan will be settled, before any payment made out to family members.
How Does Reverse Mortgage Work?
Various sites and agencies will give varying ways on how it works. However, we will take a more practical approach.
Liam and Jess are a retired couple, aged 65 and 62, who want to keep enjoying the scenic views and ambience of their home, but need to boost their monthly income to pay living expenses. Their kitchen has always been a bit dull & small, and thus, they to want to remodel it.
Their kids, Leanne and Josh, keep telling them about a reverse mortgage loan, and they have tried doing the research, but they’re not quite sure how it works.
After a few deliberations, they opted to seek professional help so that they could discuss how it works and assess their current needs and future goals.
After a successful visit and understanding what it entails, the FHA appraiser determined that their home’s value is £250,000. They currently owe £35,000 on their mortgage.
So, how does this work?
Typically, the financial institution tests the value of your property and offers you an equity loan based on a conservative estimate of the home’s market value. Since you will live in the premises, and property values are never constant, the mortgage company safeguards its interest by proving a conservative estimate on the property.
With £250,000, they may offer you a maximum loan of perhaps £200,000. For you to access the credit, you have to be at least 62 years old.
There are also reverse mortgage terms and conditions that you have to comply with. So, let’s say you decide to leave the house. You must make sure that you put it up for sale and clear your loan. Furthermore, the credit’s given under the condition that the estate is maintained and insured at all times.
Finally, as for the loan schedule, you’re not paying any monthly repayments as long as you’re alive, and you can receive the loan in one bulk payment or opt to withdraw a portion every month.
The best reverse mortgages providers will offer you the option of drawing down equity based on your needs. It has ramifications after death because the loan and its interest will have to be cleared before family members getting any inheritance money from the sale of the estate. The more you borrow, the higher the amount you have to repay.
Types of Reverse Mortgage
Now you know more about reverse mortgages and how they work.
Therefore, as you ponder on whether a reverse mortgage is perfect for you, you need to decide which of the three types of reverse mortgage will best suit your needs.
1. Proprietary Reverse Mortgages
These are private loans that are sponsored by the corporations that develop them. If you own a higher-valued estate, you may get a more substantial loan advance from a proprietary reverse mortgage provider.
If your estate has a higher appraised value and you have a substantial mortgage, you might qualify for more funds.
2. Home Equity Conversion Mortgages
These are federally insured, and you can use them for any purpose you see fit. They’re also more costly as compared to the proprietary reverse mortgages or the traditional home loans.
They depend on a variety of factors like:
- your age
- the form of reverse mortgage you choose
- the appraised value of your estate
- current market interest rates
- a financial assessment of your disposition and ability to pay property taxes and proprietor’s insurance
In overall, the older you are, the more equity you have in your home, and the less you owe on it, the more funds you get.
Before you apply for a HECM, you must first meet up with a counsellor who will:
- explain the loan’s costs and financial implications
- the possible alternatives to a HECM – like the government and non-profit organisations, or a single-purpose or proprietary reverse mortgage
- aid you in comparing the costs of various types of reverse mortgages and break down the different payment options, fees, and other expenses that affect the total cost of the loan over time
3. Single-Purpose Reverse Mortgages
They are the least costly option and are mostly sought out by homeowners with moderate incomes.
They’re backed up by some state and local government agencies, and non-profit organisations, but they’re not globally available.
You can only use these loans for only one purpose, which the lender specifies.
For instance, the provider might say that you can only use the loan solely to pay for home repairs, improvements, or property taxes. It makes them somewhat limited compared to other methods of releasing equity.
Pros & Cons of Reverse Mortgage
Just like most financial products, reverse mortgage loans have their drawbacks and advantages, and they include:
|There is no repayment if the estate is your primary residence and you stay aloof on matters of property taxes, insurance, and home repairs||It lowers the amount of equity for your heirs|
|Most of the closing costs can be bankrolled into the loan, which lowers the out-of-pocket costs||Depending on the provider or type, the up-front fees may be higher than other forms of financing|
|Allows you to supplement your income with reverse mortgage funds||It can affect need-based government help like Social Security Income (SSI)|
|One can use it to pay off other existing mortgages||The loan can become due when a “maturity event” ensues, like the last surviving mortgagor (or non-borrowing spouse meeting specific conditions) dies, the estate is no longer the pledger’s primary residence, or if the mortgagor vacates the property for over 12 months for non-medical matters. It will also become due if the homeowner does not stay up-to-date with the property taxes, insurance, homeowner’s association fees, and home repairs.|
|Reverse mortgages involve the flexible disbursement preferences: lump sum, monthly long-term payment, a line of credit or a combination of all|
|The borrower and his/her estate will never owe more than the fair market value of the estate as stipulated by a licensed FHA-certified appraiser when the reverse mortgage becomes payable|
|There are no prepayment consequences if you pay off the mortgage early|
|You can opt to use the reverse mortgage proceeds as you wish|
What Are the Criteria for Reverse Mortgage?
There are certain stipulated conditions for reverse mortgages that one must fulfil to apply and use this financial product successfully:
- You should be at least 62 or older to qualify, and if you are multiple borrowers, the youngest should be 62.
- It would be best if you met the market demand – your home must have significant equity, and as a rule of thumb, it must have about 40% equity.
- You must live in the house. You can only take up the loan if your current residence is your primary home. If you stop living there for 12 months, the credit will become due.
- Have your financials assessed – before you get your loan, you must take a financial assessment, which will review your income and credit history. Based on the results of the evaluation, they may put aside some of the loan’s proceeds to pay off the property taxes and insurance.
- Understand the five payout options – lump sum, tenure, term, a line of credit, modified tenure, and modified term. The lump sum and line of credit are straight forward. However, tenure, term, and the altered versions refer to monthly payments.
- You must pay off your mortgage – use the proceeds of your reverse mortgage to pay off your current mortgage balance.
- You can have access to some but not all of your equity – you will not get all your home equity from the reverse mortgage. Instead, you will get a certain percentage calculated by your prevailing interest rates, age, and the home value.
- Your reverse mortgage lender will most likely not be a public bank – most lenders are smaller companies that concentrate on this type of loan.
- Getting a reverse mortgage loan may not be your best option. For some, there are better alternatives, like a home equity loan.
You no longer have to worry about not having enough money to sort out your bills and other financial needs. Unlike most traditional mortgages that let you access funds to purchase a home, reverse mortgages allow you to withdraw a portion of the equity available in your home and spend the money you receive as per your wishes.
So, if you need to know more about this financial product, be sure to click here to see how much equity you can release and chat with an expert for free.
How much money could you release?
A reverse mortgage plan allows you to access the value of your home, tax-free without having to sell up, so that you can have money to spend on whatever you want or need.