When you take out a mortgage to buy a home, interests accrue every month and you are expected to make monthly payments.
With a reverse mortgage, it is where you own a home, you give the home to the bank, and they give you upfront payments. Interests start accruing on a monthly basis and you do not repay the loan until after you pass away or move out. Therefore, when you pass away, you will not repay the loan, but the estate is sold to repay the borrowed sum.
Ready to find out the MUST-KNOW details of a reverse mortgage?!? In this article, we unveil the truth about a reverse mortgage. Keep reading to find out some of the most important things to know about a reverse mortgage.
1. The Reverse Mortgage is a Loan!
Yes, that’s right. A reverse mortgage is a loan.
The truth is that the interests continue piling up over the loan lifetime. In some cases, the interest accumulates to the extent where it exceeds the property value. The interest accumulation is added to the principal amount, overgrowing the home equity.
2. The Borrower Incurs the Loan Fees
Just as in the closing of the conventional loan, the borrower will pay for the reverse mortgage-closing fee. The total fee includes the insurance premiums, the loan origination fee and the total closing costs. By incorporating this cost into your loan, the total proceeds of the loan will reduce significantly. Therefore, you qualify for a lower principal amount, after the cost of the loan has been deducted.
3. You have to go through an application process
The reverse mortgage involves an application process and the first thing the lending bank will look at is property equity. Only the homeowners who have enough equity available qualify for the loan. Therefore, even if you are the property owner, you do not qualify for the loan automatically. You have to show that the property has enough equity after offsetting the outstanding home loan, and paying the property maintenance costs. In addition, you have to illustrate the ability to pay property tax, house maintenance cost, residence membership renewal and any other cost that relates to the property.
4. The Loan has to be Repaid
Although a reverse mortgage will not come with monthly repayments, the amount falls due at some point. This is for as long as the borrower lives in the home he has borrowed against. The reverse mortgage is due when the last borrower on the original loan leaves the property or has passed away. For instance, if an elderly person has moved to an assisted living facility and stays there for over 12 months, the lender will start requesting back the amount.
5. Who should take the Reverse Mortgage?
The reverse mortgage is not a good idea for everyone. For instance, if you are looking for an emergency loan or short term financing, you might be better off applying for alternative financing. A reverse mortgage sometimes requires closing costs so it may not be a good solution if you want a short-term solution.
Additionally, the reverse mortgage is not good for a couple who plans to move home soon. Consider that if you move home while the mortgage is not fully repaid, you risk losing property ownership.
What are Some of the Reverse Mortgage Payment Options?
Reverse mortgage borrowers can receive the loan proceeds in different options. Here is a quick overview of some of the disbursement methods when it comes to reverse mortgage.
1. The Line of Credit
This is the most common choice among reverse mortgage borrowers. This option allows the borrower to receive the funds to help in financing the daily living expenses. The amount grows overtime hence it is a good option for the borrower looking to maximize borrowing potential.
2. The Term or Tenure payments
The term payment gives the borrower fixed payments over a predetermined period. The tenure payment allows for monthly payments for the life of the loan. The approach is ideal for a borrower who wants to delay withdrawing social security savings.
This allows the borrower to take the loan proceeds all at once. The amount can be used to finance different projects. For instance, it is good when you want to stay home renovation, or for making medical payments.
If you are experiencing tough financial times after you have retired. Consider tapping into your home equity. It is an easy and efficient approach letting homeowners tap into the property equity to finance daily living expenses. Talk to a reverse mortgage company near you for advice on reverse mortgages.
Hi, I'm Parker
Not many mortgage professionals are CPA’s. I bring that extra level of financial expertise to each transaction to ensure you and your family is making the best decision to meet your goals. 👊
Hi, I'm Rex
I’ve been in the mortgage industry since 1978 and love to fly across Arizona in my single engine airplane to help various consumers learn and obtain a reverse mortgage. Give me a call today!