A reverse mortgage is a special type of loan in which a financial institution (a lender) can convert your home equity into cash. Unlike traditional mortgages, a reverse mortgage is a type of mortgage in which the lender is the one that is paying you for your home equity instead of you paying them.
The payments and their amounts depend on your home’s equity and value but also on the age of the applicant. These payments can come in different forms such as a lump payment, monthly installments, a line of credit or any combination of these. There are also no repayments necessary unless the applicant sells his home, moves out of his home or passes away.
Some of the most common requirements for these types of mortgages are:
- The applicant must be at least 62 years old
- The applicant must have a lot of equity in his home
- The reverse mortgaged home must be the applicant’s primary residence
- The applicant must own the home, or have a very little balance on it’s mortgage
The good thing about these types of mortgages is that the applicant doesn’t need to show proof of income, and also they have a very low credit requirement.
Some of the disadvantages of these types of loans are that they’re quite expensive. They can cost you up to 10% of the value of your home over the course of the loan in fees, origination fees, appraisals, titles, insurance premium and you will still have property taxes and home maintenance expenses on your hands. Also if you intend to leave the property to your heirs, it is not a good idea to engage in such a loan because your heirs would have to pay the whole refund otherwise they will not be able to have the property.
People usually look for such of loan when they are completely out of other options like renting the house, selling it or are unable downsize their expenses any longer.
This is pretty much a last resort option for anyone but considering the bad economy going on these days, there are around ten thousand people that consider and engage in such loans each month.
loading...
Related Links:
Reverse mortgages – as one of the newest forms of borrowing available – is confusing to many that have heard of it. Perhaps the only type of mortgage that gives you money without monthly payments, it can seem like a great idea for many, but is still bewildering for most that try to understand exactly how it works. For those that have questions about reverse mortgages, below are some of the most frequently asked questions about these lending options.
Commonly Asked Question 1: What Happens With the Loan When You Die?
The reason that you are able to receive income off the equity of your home without making any monthly payment is because it is assumed that you will pay back the loan through the income received when you pass away. Since the loan is only available to seniors, it is designed to allow you to stay in your home, but slowly sell it to your reverse mortgage lending agent until they turn around and sell it themselves once you leave the home, recouping their losses.
This is where it can become somewhat complicated. Once you have passed on, banks and heirs have a few options:
- Your heirs may have the option of paying back the loan themselves (only with some lenders).
- Assuming they do not pay back the loan or the option is unavailable, the home goes for sale.
- Once the house is sold, initial profits go directly to pay back the loan.
- Any additional profit on the home goes to the heirs of the deceased.
Depending on how long you stayed alive in the home, the amount of your loan may equal to the cost of selling your home, and no/little income will go to your heirs. In addition, some lenders do not give heirs the option of buying the home directly.
Commonly Asked Question 2: What Happens if You Have an Existing Mortgage?
The greater your mortgage, the harder it is for you to qualify for your loan. But if you have an existing mortgage and you do qualify, the amount you qualify for will first go to pay back the mortgage. So If you have $150,000 left on your mortgage, and you qualify for a $200,000 reverse mortgage, the initial $150,000 will go to pay back the mortgage and you will be left with the remaining $50,000.
If you qualify for less than the value of your mortgage, you can still use it to pay back the vast majority of your mortgage, so that although you will not be receiving any monthly payments through your reverse mortgage, you will still be able to reduce your monthly payments considerably, which will have its own benefits.
Commonly Asked Question 3: Why Do You Need Counseling to Receive a Reverse Mortgage?
Required financial counseling by an unrelated third party is required to get a reverse mortgage for a variety of reasons:
- Counselors, with no financial incentive to encourage you to get the mortgage, will make sure you are not being taken advantage of by an unscrupulous private lender. This greatly reduces the chances of scams.
- Reverse mortgages are not designed for everyone, and financial counselors help verify that you understand all of the implications that occur by receiving a reverse mortgage.
- Counselors will ensure you understand your tax rights.
In addition, financial counselors are simply there to guide you through the process. In order for reverse mortgages to not become a source of scamming, financial counselors provide unbiased advice on not only planning your finances with reverse mortgages, but understanding your rights and the implications that go with these types of loans.
Reverse Mortgages – Confusing but Useful
Since instituting reverse mortgages less than two decades ago, the popularity of these loans has increased dramatically. Unlike other types of loans, these mortgages do not have nearly as many scams or flaws as other lending programs, and may be incredibly beneficial for those that do not intend to pass down their home and are living on a monthly income.
But though they are beneficial, they can also be exceedingly confusing and are not right for everyone, so make sure that you not only find out everything you can about reverse mortgages on your own, but come equipped with questions to ask your financial counselor.
loading...
