What are Reverse Mortgages and How do They Work?
If you are a senior experiencing periods of cash-drought, then a reverse mortgage might be the perfect solution for you. The economy can change quickly and unpredictably, which can be really stressful for people who are living just above their means. It’s always nice to have a little extra in the bank for a rainy day, or in case something unexpected happen.
The good news is there is a refinance option, a reserve mortgage, which allows you to borrow money, against your house’s equity, and put it in the bank now. You can spend it on healthcare, paying off debt, buying a new property, or however you like. This options is available to seniors 62 or older, gives you a little extra wiggle room in your pocketbook without you having to sell your house.
You don’t have to pay it for as long as you live in the house but if you move, sell it, or die then the loan matures.
How a Reverse Mortgage Works
A reverse mortgage is a little harder to comprehend because it is different than a traditional mortgage.
Usually, you take out a loan to buy a house and then make monthly payments until you pay off the amount you borrowed (including cost, taxes, and accrued interest).
With the case of a reserve mortgage, your lender is actually giving YOU money. So, instead of you paying the lender every month, the whole process is reversed so that your lender gives you money each month.
They will keep a record of how much they are loaning you each month, and add it on to the amount you owe them when you do have to pay back your loan.
You don’t have to pay back this loan unless you pass away, sell the house, or move out.
Once you’re approved, you can choose how you would like to receive your month either all at once, periodically, or as you wish.
- Single disbursement: you can receive the whole amount in one payment. You can get the funds immediately, but this option offers less money overall.
- Term payments: you can ask to receive a fixed amount of money every month over a specified duration.
- Tenure payment: just like term payments, you will be given a fixed amount of money every month.
This option last for as long as you live in the house. Which is different to the term payment option, which stops after a certain period of time.
- Line of credit: get the money when you want, at any time. If you need some this month but not the next, you can use this option. There are no regular payments to you, and you can request the funds whenever you want until you’ve used up the full loan amount.
- Combination: you can choose to combine a line of credit and monthly payments so that you have a guaranteed amount each month and an ‘emergency’ amount to draw from whenever you need a little extra.
Most lenders will allow you to change your payment option, but that might attract a small fee.
Who Would Benefit From A Reverse Mortgage?
Does reverse mortgage make sense? Yes, it does, but not for everyone.
If you intend to leave or sell the house soon (within three years), then this might not be the best option because you will have to pay back the loan as soon as you do. Also, this might be tricky if you’re planning to leave your house as an inheritance. Once they take over the home, they will have to pay off the amount you borrowed against the house.
The total amount you’ll be approved for depends on your age, type of reverse mortgage, the value of your house, interest rates, and your ability to meet financial responsibilities like tax and insurance obligations to the house.
Types of Reverse Mortgages
Here at TJC Mortgage, we know it all starts with a home loan, but it doesn’t have to end there.
We would be happy to work with you to review your situation and see what type of reserve mortgage will work best for your individual situation.
There are three main types:
- Home Equity Conversion Mortgage (HECM): this is the most common type. It is backed by the Department of Housing and Urban Development (HUD) and can be used for any purpose.
- Proprietary reverse mortgage: this type is usually created and offered by private companies (lenders). That means it is a private mortgage whose terms and conditions are determined by the lender.
- Single-purpose reverse mortgage: the proceeds from this type of reverse mortgage may only be used for a single purpose that the lender specifies. For example, some lenders will only approve a home repair reverse mortgage.
Who Does Reverse Mortgages?
Like any other mortgage loan, reverse mortgages are offered by lenders such as banks and other mortgage companies. Despite the fact that HUD backs HECM loans, it does not actually provide them.
They just guarantee the loan, so that lenders feel more comfortable offering better terms and interest rates.
Single-purpose reverse mortgages are mostly offered by non-profit organizations as well as some local and state government agencies.
Maturity of the Mortgage
At some point you will be responsible for paying off your loan, meaning your reverse mortgage loan due will occur. When one of these maturity events happen, you will not receive any more money, but will then need to start paying back the loan.
- All the borrowers die
- The property is sold to a third party who is not a borrower
- The borrowers no longer live in the house as a primary residence
- You completely fail to pay property taxes and insurance
- You fail to keep the property in a reasonably good shape
Benefits of Reverse Mortgages
Do reverse mortgages have any advantages? They most certainly do.
- They offer seniors a simple way to get money
- You will not have to worry about monthly payments
- The fund will increase your cash flow. In the case of HECM loans, there is no limitation to how you can use your money, which can offer a great relief for people who just need a little extra funds.
In return, you are responsible for maintaining your property and keeping it in reasonable shape and might be subject to slightly higher fees and closing cost than other types of loans. We’d be happy to offer you a quote and walk you through the process today.