While the U.S. housing market is well into its recovery with mortgage delinquency rates continuing to drop, many seniors still remain in need of financial assistance. Fortunately, for qualified homeowners aged 62 and over, a reverse mortgage loan may be able to help.
As with all investment vehicles and financial products, reverse mortgages work best when paired with the right homeowner. There’s a lid for every pot, as the old saying goes, and while one homeowner’s answer may be a reverse mortgage, it pays to do the research first.
How Do Reverse Mortgages Work?
A reverse mortgage is a way for seniors to receive cash payment(s) based on the equity they’ve accumulated in their homes. The payment (or payments) is available to the homeowner as long as they meet certain requirements, which typically include using the property as the principal residence and keeping up with mortgage payments.
Borrowers are usually also required to pay property taxes, home insurance, utilities bills and other costs associated with the primary residence, although money provided by the reverse mortgage can be used for that purpose.
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It may be in one’s best interest to do so, and a trustworthy lender should advise homeowners of that fact. The difference between a second mortgage and a reverse mortgage is that borrowers must pay back the former with interest. In the case of reverse mortgages, a borrower receives money based on the equity in the home in exchange for the property when the borrower no longer needs it – upon death or when the borrower moves out.
Of course, any remaining equity (and monies repaid) may be passed on to heirs. And, it’s often the case that a reverse mortgage beneficiary can use the monies received to finance the purchase of another residence. This is a good example of using a reverse mortgage to leverage future interests.
How Do I Benefit Now?
In addition to the benefits discussed above, reverse mortgages provide an avenue for seniors to stay in their homes when they otherwise wouldn’t be able to. A reverse mortgage can give seniors the cash they need to pay for home repairs, medical expenses, or various other expenses that cash strapped seniors today might encounter.
It’s fair to say there are risks involved in any type of financial transaction and reverse mortgages are not exempt. If a person is unsuited for a reverse mortgage – or certain type of reverse mortgage – entering into one can have disastrous results. For example, if a senior opts for a lump sum payout, but can’t afford the ongoing property expenses (taxes, utilities, etc.), once that lump sum dries out they could potentially lose their home.
Those risks can be greatly reduced, however, by having a set of personal and financial goals, a timeline in which you want to achieve them and a good understanding of your options when it comes to reverse mortgages.
Important things to consider when reviewing reverse mortgage options include:
Short- and long-term living plans
- Current home value and equity
- Age and health
- Lender fees and reputation
- Payment options and availability
How Can I Qualify?
The law requires that borrowers be at least 62 years of age and occupy the home used to finance the reverse mortgage payments. These are basic requirements only, however, and different lenders may impose further guidelines in addition to these depending on the loan arrangements.
Anyone interested in reverse mortgages is advised to speak with a reputable lender, and ensure they have a firm grasp on the pros and cons related to this type of financial transaction. The Reverse Mortgage Guides website is a great place to start that due diligence process.