When people reach their golden years, some need to have access to more money so that they can supplement their incomes or can help to pay for their long-term care needs. One potential vehicle for giving older adults access to money is a reverse mortgage. This is a type of home equity loan that lets eligible homeowners tap the equity that they have in their homes. If you would like more information about reverse mortgages and whether they might be an option for you, Elder Care Direction can help you to understand how these loans work.
How reverse mortgages work
Reverse mortgages do not work the same way that traditional mortgages do. This type of mortgage lets the lenders determine how much the borrowers are able to to take based on the borrowers’ equity and the current values of their homes. The lender then will provide the money to the borrowers in one of the following ways:
- Monthly payments
- Line of credit
- Lump sum payments
- Combination of these options
The borrowers are able to continue living in their homes and do not have to repay their loans as long as they stay in their homes. When a borrower moves out or passes away, the loan can then be repaid by selling the home. Family members may also refinance the homes in their own names, paying the reverse mortgage balances by getting new mortgages.
The equity decreases as the lenders make payments to the borrowers. If there is money left after the bank has been repaid through a sale of the home, the balance is paid to the estate’s heirs.
Eligibility for reverse mortgages
Only homeowners who are ages 62 and older may take out reverse mortgages. They will also undergo a financial assessment to make certain that they will be able to continue paying the property taxes, maintenance and upkeep, and the homeowner’s insurance. Borrowers who do not make their property tax or insurance payments may lose their homes.
Borrowers must also own their homes outright or have substantial equity in them. The homes must be the primary residences of the borrowers, and they must also meet HUD guidelines.
Pros of reverse mortgages
There are several pros of reverse mortgages, including the following:
- Proceeds from a reverse mortgage are not taxed as income;
- It is easier to qualify for reverse mortgages;
- The loans do not have to be repaid during the borrower’s lifetime unless he or she moves out of the home; and
- The money can be used for many purposes.
Cons of reverse mortgages
There are also a couple of cons of reverse mortgages, including the following:
- Additional costs and fees can make reverse mortgages expensive;
- Reverse mortgages reduce how much money a senior can leave to his or her heirs
The costs of reverse mortgages include the following:
- Servicing fees for loans with monthly or annually adjusting interest rates
- Loan origination fees
- Mortgage insurance premium
- Third party fees
You will want to review these fees carefully before you decide whether to get a reverse mortgage.
How to get a reverse mortgage
To get a reverse mortgage, you and your property must meet the eligibility guidelines that were previously discussed. You must also undergo financial counseling to make certain that you are fully informed. You will need to find a reverse mortgage lender. HUD maintains a list of HUD-approved HECM lenders on its website. There are also lenders who offer private reverse mortgage loans.
Reverse mortgages when one spouse is younger than age 62
All reverse mortgage borrowers must be at least age 62. If you are married to someone who is younger than 62, he or she will not be on the loan. When you die, your spouse will either need to pay off the reverse mortgage or will lose your home. Under existing regulations, younger spouses may be listed on the contract without being named as borrowers. When the borrower dies, the contract will enter a deferral period so that the younger spouse has a chance to keep the house.
Talk to the professionals at Elder Care Direction
Getting a reverse mortgage might help you to live more comfortably and to pay your bills. For some seniors, reverse mortgages are a good way for them to enjoy their golden years. The decision whether or not to get a reverse mortgage is an important one. People should consider their options carefully before they make their decisions. To learn more about reverse mortgages and the other options that you might have, contact Elder Care Direction today.