If you are at least 62 years old, own your own home, and have sufficient equity, you may be a good candidate for a reverse mortgage. This loan option allows seniors to access their home equity without making loan payments for life. A reverse mortgage can allow you to remain living where you currently are without loan payments while benefiting from a lump sum loan or monthly payments to supplement your income, cover medical expenses, pay off the rest of your mortgage, and more.
Reverse mortgages are a popular financial tool for seniors. With a reverse mortgage, you can potentially improve your quality of life while staying in your home. It's important to understand that a reverse mortgage isn't for everyone, however. Before choosing a reverse mortgage, make sure you know how it works and whether it's truly the best option for your situation.
1. How exactly do reverse mortgages work for people?
A: These are a unique loan product designed for seniors living in their own home. A reverse mortgage lets people tap into their home's equity and use the money for any purpose without making any payments on the loan as long as you live in the home and meet basic requirements. The amount you will receive from the loan depends on interest rates, your home's value, your age, and whether you need a "set aside" to cover property taxes and insurance. No payments need to be made on the loan as long as you live in your home. This means the balance of the loan will increase over time, not decrease. While the balance of the loan may far exceed the home's value by the time you leave the home or pass away, the amount due if heirs wish to buy the house can never exceed the home's actual market value.
2. How can I receive loan proceeds?
A: A reverse mortgage is very flexible and allows you to choose how you want to receive your loan proceeds. You may choose to receive all of the money upfront as a lump sum or you can receive monthly payments. The tenure loan option gives you equal monthly payments for as long as you stay in your home. The term loan option spreads payments over a specific period of time such as 10 years. You can also choose a credit line to access only the money you need, when you need it. You can even choose a combination of payout methods such as a credit line and monthly payments or a lump sum at closing plus monthly term payments.
3. What are the requirements to get a reverse mortgage?
A: To qualify for a reverse mortgage, you must be at least 62, own your home, and have sufficient equity. Your lender will conduct a financial assessment to ensure you can continue paying financial obligations that include property taxes, homeowner's insurance, and home maintenance. You will also be required to complete HUD-approved reverse mortgage counseling. Going forward with your loan, your obligations will include maintaining your home, paying property taxes, HOA dues, and homeowner's insurance on time, and living in the home as your primary residence.
4. How can the funds from a reverse mortgage be used?
A: Reverse mortgage funds are available for virtually anything without restrictions. The money can be used to pay down debt, make improvements to your home, supplement income in retirement, travel, buy a vehicle, pay for long-term care insurance and medical bills, and more. You may be required to set aside funds from your loan proceeds to pay for future insurance and taxes. This is known as a "set aside." You may be required to set aside some of the funds if the lender determines you don't have enough residual income to meet these expenses for the rest of your life. The money from a reverse mortgage is also considered a loan advance, not earned income. The payments will not be taxable and typically don't affect Medicare or Social Security.
5. How is a reverse mortgage paid back?
A: You do not need to make any payments toward your loan as long as you remain in your home, keep the home maintained according to FHA standards, and pay your insurance and property taxes. The loan will become due when all borrowers on the loan either pass away or move out of the home, including into a nursing facility. If one spouse passes away and the surviving spouse is not on the loan, but the loan was made after August 2014, the non-borrowing spouse can remain in the home by meeting requirements such as being married to the borrowing at the time of closing and death and continue to occupy the home.
6. What happens to the home when the borrower dies?
A: Once the borrower dies, heirs have several options. Heirs will never be responsible for the balance of the loan on a reverse mortgage and the balance will never exceed 95% of the home's appraised value. To keep the property, the loan can be paid in full with a new mortgage. The home can also be sold if it's worth more than the loan amount. Heirs can also choose to walk away from the home without owing anything.
7. Who can benefit from a reverse mortgage?
A: A reverse mortgage isn't for everyone. This loan option may be a good choice if you plan to stay in your home, want to access equity, and you can afford maintenance, taxes, and homeowner's insurance. Reverse mortgages may serve many purposes, including paying off debt, supplementing retirement income, and paying off the rest of a mortgage.
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