Reverse Mortgage and Your Retirement

Oct 13, 2021 03:32 PM ET
Reverse Mortgage and Your Retirement

Reverse mortgages are a special loan that lets homeowners over the age of 62 who have already paid off their mortgage borrow a portion of the equity in their house tax-free. They are different from traditional mortgages since financial institutions are the ones that pay homeowners instead of the other way round.

This type of mortgage does not require homeowners to make monthly payments and does not need them to sell their property. Homeowners are free to stay in their houses for as long as they want. However, the loan must be repaid in case of the owner’s death or if they relocate or sell their home. In addition, lenders have the right to seize and sell your house if you fail to make payments on your loan or refuse to do so.

Key takeaways

Here are some quick-reference tips to simplify the concept for you:

  • Your mortgage balance is zero or close to it. However, your most valuable possession is your home, and you have no intention of selling it to obtain the additional funds you require to live the life you desire.
  • You can borrow up to a percentage of the value of your house, plus interest, from a lender who specializes in reverse mortgages. The lender uses information such as your age, location, and value of your home to determine how much money they can lend you.
  • The lender deposits the agreed sum in your account, with the house still in your possession. Therefore, you get your financial needs sorted without losing your home.
  • In most cases, you'll only have to pay back the loan (plus interest) if you move out or die while still residing in the house.
  • It doesn't matter how much debt you have acquired. You can never owe more than the value of your property.
  • You hold on to the extra funds generated following the sale of your home. For instance, if your home sells for $500,000 but you owe the lender $100,000, you'll walk away with $400,000.

One reason these types of mortgages are known as deferred payment loans is that they do not require immediate repayment. Instead of making payments on your house loan as soon as you borrow money, the installments are postponed. There are many advantages of using these mortgages for seniors who are on a fixed income or who are relying only on assets they have built up over their lifetimes.

Reverse mortgage rules and regulations

The first qualification, as cited above, is that these financing options are only available to homeowners who are 62 years old or older. Additionally, you must meet the following criteria in order to be eligible:

  • The property must be yours outright, or at least a significant portion of your mortgage must have been paid off.
  • The property you are using to apply for the loan must be your principal residence.
  • If you owe money to the government, you must pay it back on time every month.
  • You must be able to make payments on your property taxes, homeowners’ insurance, and homeowners association dues in the future.

Costs of a reverse mortgage

If you get a government-sponsored reverse mortgage, you'll have to pay two fees:

  • For those who take out a lump sum of money, the interest rates may be fixed. The rates usually equivalent to those charged by conventional mortgage lenders.
  • Insurance premiums: The upfront prepayment premium is 2 percent, and the annual premium is 0.5% for mortgages backed by the federal government.

The purpose of mortgage insurance is to shield lenders from the borrower’s risk of default, even though reverse mortgages are less likely to default than traditional mortgages. However, they are nevertheless subject to default if owners fail to maintain their property, fail to pay property taxes or fall behind in insurance payments.  

Along with these expenses, lenders will levy their own origination fees. The fees vary from lender to lender but are often between 1% and 2% of the loan amount. In addition to these expenses, lenders often impose closing charges, property evaluations, loan servicing/administration, and other fees.

Pros

  • Can help pay for late-life medical bills that would otherwise be unaffordable.
  • All expenses can be added to the loan balance.
  • The interest rates charged on these properties are among the lowest in the market.
  • You do not have to pay back loans with your own money.

Cons

  • The total cost of borrowing, including fees, may be high.
  • You must repay the loan in order for your successors to be entitled to your property.
  • To be eligible, you must either own the property in its entirety or at least half of it.
  • Mortgage insurance is required for the majority of borrowers

In summary

Reverse mortgages allow homeowners in their sunset years to have a source of income that can support a decent lifestyle while also ensuring that they keep their homes. However, the downside to it is that some property owners may never be able to pay it back.

However, it is common for borrowers to default on their loans. Usually, the heirs end up selling the property if the borrower dies before finishing repayment. The advantage of such a loan is that the extra cash generated from the sale following the repayment of the outstanding loan goes to the heirs.


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