What is a Reverse Mortgage?
Reverse mortgages are available to homeowners aged 62 or older who have managed to accrue plenty of equity in their home. There is no standard for equity, but experts will recommend at least 50%. Find out more about how it works, and whether or not its consequences are worth the rewards.
The Reverse Mortgage is a Type of Loan
The reverse mortgage is a loan that provides a homeowner with cash based on how much equity they have in their home. They are different from other types of mortgage loans. Instead of the homeowner paying their lender, the lender pays the homeowner by drawing on the equity the homeowner has built up over the years. The terms and the rates of the loan will vary from homeowner to homeowner, which is why homeowners need to first evaluate the advantages and disadvantages before consulting their lender.
As the lender continues to make payments to the homeowner, the balance of the original loan increases and the accrued equity decreases. The cash can be spent on anything they want, whether it's related to the home or not. In this case, the homeowner is essentially turning back the clock. They'll own less and less of the home with a reverse mortgage and owe more and more.
There Are Payback Terms
Reverse mortgages function differently based on the lender and the amount of equity in the home. However, most loans aren't required to be paid back until the homeowner either sells the home or passes away. There is no standard interest fee that homeowners will pay for a reverse mortgage. In the past, lenders have charged higher rates, but these rates have fallen as more and lenders jump into the market.
The fees and interest of the loan are typically already built in and financed by the existing equity. It's a way of paying for something without physically writing out a check or having the funds deducted from an account. Many homeowners will use it as a way to supplement their retirement or finance repairs on their home.
Your Estate Will be Impacted
The downside of taking out a reverse mortgage is that there's less of the home to go around when it comes time to sell. Either the homeowner has to pay back the lender with the funds, or they have less to pass on to their descendants. If the Westchester homeowner has high-interest rates, it can swallow up all the progress they've made over the years. However, there is a silver lining with reverse mortgages. If the homeowner owes less on the reverse mortgage at the time of the sale than the price the sold the house for, they're able to keep the leftover funds.
Government-Backed Options Are Available
The most recommended type of loan for homeowners is the High Equity Conversion Mortgage (HECM), which is available through the Federal Housing Administration (FHA). Because an HECM is financed by the government, the terms tend to be more forgiving. It also comes with the added benefit that helps owners forgive excess debt. In other words, if the balance of the loan is more than what the home sells for, the excess won't need to be repaid. (In fact, this is standard on most reverse mortgages, but the FHA version offers this benefit plus more attractive interest rates.)
Homeowners Still Need to Pay for Their Home
A reverse mortgage will only cover the lender requirements. Additional expenses, like insurance and property taxes, will still need to be paid. If the homeowner defaults on these costs the lender may ask the owner to begin repaying their reverse mortgage before they've sold the home. Should the homeowners' descendants choose to keep the home, they're expected to pay the full cost of the loan. This is true regardless of how high the loan balance is, making it more difficult to keep the property in the family.
In addition to being 62 or older, homeowners are required to use their home as a primary residence. Homeowners cannot take out a reverse mortgage on a vacation or a rental home. They also can't own any debt to the federal government if they hope to qualify. Applicants must show that they have enough income to keep up with home-related expenses. This proof doesn't have to come in the form of direct income though, it can come from savings or from the reverse mortgage. Applicants also need to go through a consumer counseling session to ensure they understand the terms of their reverse mortgage.
A reverse mortgage can be a saving grace for homeowners who hit a financial snag in their golden years. However, they come with their own set of disadvantages as well. Whether or not this loan is worth it will depend on the total equity and future plans of the homeowner.