How Reverse Mortgages Work

Retirement is a critical stage of one’s life. And if you have not saved up enough money before then, you may become frustrated. However, if you already own a home, you can leverage its value to cater to your needs.

Your property can grant you access to funds every month, as a lump sum, or a line of credit. In this article, we will answer the burning question, “how do reverse mortgages work?” You will also find out whether this financing option is suitable for you or not.

What is Reverse Mortgage?

Reverse mortgage is a category of home loan specifically for senior citizens; 62 years and older. It allows a borrower to convert a portion of their home’s equity into cash. The money can be used to pay medical bills, augment income, or pay off an outstanding mortgage.

The upside of this loan is that you do not have to sell your property or make extra monthly payments. Additionally, you do not have to pay back the loan. What happens is that the amount becomes due when the borrower

• Dies
• Stops paying homeowners insurance and tax
• Sells the house
• Moves out of the home for up to one year (unless a legal spouse or co-borrower continues living in the home)

To avoid losses, lenders ensure that the value of the property matches the loan amount.

How a Reverse Mortgage Works

In a traditional mortgage, the borrower pays a certain amount of money monthly as loan repayment. But in a reverse mortgage, the borrower gets paid. The lender subtracts this money from the borrower’s home equity. Also, the borrower does not pay tax on this income.

The lender determines the limit you can borrow. However, the property must belong to you or your equity should be up to 50 percent. If the property does not belong to you, you must use the funds from the reverse mortgage to pay off the existing mortgage.

What Type of Property Qualifies for a Reverse Mortgage?

The following properties qualify for a reverse mortgage:

Condominiums

Condos are residential buildings with several individually owned units. They may qualify for reverse mortgages if the Department of Housing and Urban Development approves of them. You can visit homeguides.sfgate to find out whether the FHA approves of your condominium.

Family Homes

Single and multi-family homes easily qualify for the loan. However, a multi-family home, such as a duplex, should have up to four units where the borrower utilizes one unit as their main residence. The Department of Housing and Urban Development defines the main residence as a place where a person spends majority of their time. If the home has more than four units, it is categorized as a commercial property and won’t qualify.

Manufactured Homes

Manufactured homes are prefabricated housing units. They are also known as mobile homes. The parts are built in a factory and assembled on site. If your mobile home meets the following requirements, it could qualify:

• The floor is up to 400 sq. feet.
• It was constructed according to the Federal government’s standard stated in 24 CFR Section 3280.8. Mobile homes produced before June 1976 do not qualify.
• The home has a fixed foundation.
• It was not situated in another location before the borrowing period.
• It is categorized and taxed as real estate.

Pros of a Reverse Mortgage

Below are some advantages of a reverse mortgage.

1. You can easily access funds to cover living expenses and medical bills as well as repay debts when you retire.
2. You will enjoy your retirement.
3. You do not have to pay back the loan or make payments monthly.
4. You can use the loan to pay back an existing mortgage, especially if your home is facing foreclosure.
5. A non-borrowing spouse can reside in the home without worries if the borrower is deceased.

Cons of a Reverse Mortgage

Below are some drawbacks of a reverse mortgage.

1. You must not stop paying your homeowners insurance and taxes unless you want to forfeit the loan’s privileges.
2. Your heirs cannot inherit the property unless they pay back the loan.
3. The property must belong to you and you must own up to 50 percent equity.
4. Borrowing against your home’s equity may be detrimental to your retirement.
5. If your spouse is not listed as a co-borrower, they will not be allowed to remain in the home.
6. If you do not compare multiple lenders, you may pay higher closing costs, which will reduce the amount you will receive from your equity.
7. Some mortgages require insurance, which might make the process more expensive.

Final Thoughts

While reverse mortgages sound appealing, you have to be careful not to fall for scams. Having a good knowledge of how the loan works will help you to make better decisions. The rates differ from one lender to another; it’s not specific. Therefore, ensure to check out various lenders before settling for one.