Ever wonder how a reverse mortgage works? People who have lived in the same house for a long time could be sitting on a gold mine. In the last thirty years, home prices have gone up a lot, and in the last ten years, they have nearly doubled across the country. This has left a lot of homeowners with valuable equity in their homes and a lot of ways to get at that equity, the most common of which are home equity loans and mortgage refinances. The reverse mortgage is a less common option for older Americans that is becoming more popular as home prices have gone up and baby boomers are getting closer to retirement age. But do you know what a reverse mortgage is and how it works?
What is a reverse mortgage, then? A reverse mortgage is a type of loan that lets people over 62 use their home's equity to make tax-free money without having to sell the house or take out a new mortgage. In fact, a reverse mortgage is just the opposite of a regular mortgage, as the name suggests. With a standard mortgage, the borrower (or homeowner) makes monthly payments to the lender (or bank or mortgage company) to pay back the loan that the lender gave the borrower to buy or refinance the house. The interest that the lender charges the borrower for the loan is part of this payment. In a reverse mortgage, the lender pays the borrower each month instead of the other way around. But in both a standard mortgage and a reverse mortgage, the house is used as collateral to back up the loan.
How much money a borrower gets from a reverse mortgage depends on a few things, like the value of the home, the borrower's (and co- borrower's) age, the current interest rates, and any lending limits that may be common in your area. As a general rule, the loan amount is bigger if the borrower is older and if the home is worth more. Homeowners can choose to get their payments all at once, in monthly instalments, or as a line of credit. The most popular choice is the line of credit. Nearly 60% of people who get a reverse mortgage choose this option, which lets them take income or a lump sum at any time. And the borrower can use the money from the reverse mortgage for anything they want. However, most people use the money for home repairs or improvements, health care costs, paying off other debts, or taking a long-planned vacation. The only type of property that can't get a reverse mortgage is a co-op, but co-op owners in some cities, like New York, should have options in their area. If you are retired or getting close to retirement and think this might be the right product for you, I will explain how a reverse mortgage works in more depth.
For people who want to get a reverse mortgage but already have a mortgage, the old mortgage will have to be paid off in full before the new reverse mortgage can be put on the house. If the money from the reverse mortgage isn't enough to pay off the existing mortgage, the borrower will have to use savings or money from somewhere else to pay off the rest. In this case, the borrower won't get any extra money from the reverse mortgage, but they won't have to make a mortgage payment anymore! Most of the time, there is either a small or no mortgage on the home, and the borrower can then get almost all of the money from the reverse mortgage to use as they wish. The loan doesn't have to be paid back every month. Instead, the loan is paid back when the person moves, sells, dies, or otherwise loses ownership of the home. If the home is sold and the money from the sale is more than the amount of the mortgage, the extra money belongs to the person who took out the loan or their heirs.
A very important part of the reverse mortgage process is the counselling that borrowers who are thinking about getting one must go through. Your lender can help you find counselling programmes, and HUD and/or AARP approve and keep an eye on most of them. The counselling is needed to make sure you understand the program's rules and risks. By law, counsellors have to talk to you about what the new mortgage means for you and what other options you might have.
Overall, the reverse mortgage may be the best choice for older Americans who want a stress-free retirement. Just make sure you know what your options are and what you want to achieve, as well as how a reverse mortgage works.
