A reverse mortgage is tool that can be used by individuals over the age of 62 who owe little to nothing on their home. Reverse mortgages allow these individuals to take equity out of their homes to use for medical expenses, home repairs, or any other needs that they may have. For most reverse mortgages there are no restrictions on how the funds are used, except in the case of single purpose reverse mortgages from government agencies and non-profits, which are designed to be used for specific things such as home repairs or taxes.
How do you qualify for a reverse mortgage?
To qualify for a reverse mortgage the home must be your primary residence, and you must be current on your property taxes and home insurance. In addition, maintenance and repairs on the property must be up to date.
Since you don’t have to worry about paying back the loan proceeds for as long as the home remains your primary residence, income and credit score aren’t as important to reverse mortgage lenders. That being said, lenders will want to insure that you do have the means to continue paying any expenses related to the property (i.e. property taxes, maintenance, etc.)
The amount you can qualify for on a reverse mortgage is based on your age, and amount of equity you have in your home. The amount of equity is determined by an appraisal.
An important thing to keep in mind with reverse mortgages is that the mortgage essentially comes due at the point in time the home is no longer the borrower’s primary residence. This can happen if the borrower moves, or if the borrower passes away. When the mortgage comes due, the principal and interest accumulated must be repaid, which typically happens with the borrower, or borrower’s dependents, selling the home.
Since there would be less time for interest to accumulate on the loan, older borrowers can generally qualify for larger amounts on reverse mortgages.
How is a reverse mortgage paid out?
The loan proceeds can be structured to be paid out in a few different ways:
- An equal monthly payment for either a certain period of time, or until the borrower leaves the home.
- A line of credit that allows the borrower to take any amount, at any time, until the line reaches its maximum amount.
- Combinations of the above
- A single, total disbursement of the full loan amount.
Advantages of a reverse mortgage
One of main advantages of a reverse mortgage is that there are no payments due until the borrower no longer lives in the home. There is also typically a clause that protects the borrower’s heirs from having to re-pay the loan, even if the loan exceeds the value of the home.
Disadvantages of a reverse mortgage
There are some drawbacks to be aware of. Because there is higher risk associated with these specialized loans, they usually have higher interest rates and origination fees than home equity lines or traditional mortgages. Also, because interest is accumulating on the loan amount while the loan is active, the total loan amount can grow until it exceeds the value of the home.
While heirs are typically protected from having to come up with additional funds to pay that excess, sometimes this can cause issues if the borrower’s heirs wish to keep the ‘family home.’ If they wish to keep the home, they would be responsible for paying back the loan - otherwise the lender takes possession. If the loan amount exceeds the home’s value, they would have to come out of pocket with the necessary funds above and beyond what they might be able to qualify for on a traditional loan. Before you obtain a reverse mortgage on a cherished family home, it may be a good idea to have a discussion with your heirs.
Additionally, reverse mortgages are not available in all areas, so you will want to check with your local agencies to determine availability.