All You Need to Know about Reverse Mortgage

25 Oct 2020

When a financial emergency strikes, there are multiple ways to deal with it such as credit cards, personal loans, etc. But these are helpful when you are already earning and know for sure that you will be able to pay off the EMIs. But if you are retired, these options may not be as useful since you are already living on a retirement corpus. For people above 62 years of age, the reverse mortgage comes as an excellent financing option. So, let us understand what exactly a reverse mortgage is and how it works.

Reverse Mortgage Definition

As the name suggests, a reverse mortgage provides you with cash by using your home as collateral. It is the opposite of a regular mortgage in two significant ways- the lender pays you to cash instead of you paying them and with time, the amount of your loan grows instead of shrinking. There are no monthly mortgage payments in case of a reverse mortgage, and the loan comes due when you move out of the house or die. When the borrower dies, the lender typically sells the home to provide for the balance and any extra money is paid to the heirs of the borrower.

Eligibility Criteria for Reverse Mortgage

To be eligible for this loan, the borrower should be 62 years or older. In case there are joint borrowers, the youngest one should meet the above age criterion. The borrower should also meet other financial eligibility criteria as set up by the lender.

Also, the borrower should be using the home as his primary residence. The loan will come due as the last surviving borrower dies or moves out of the house. Every year, they have to certify to the lender that they are still living in the house.

Reverse Mortgage Pros and Cons

Some people think that it should be the last resort for financing whereas there are others who favor it. However, the pros and cons of a reverse mortgage may differ from one person to another.

Pros:

  • Loan proceeds may be used to pay off the existing mortgage
  • It helps in improving the cash-flow of the retired
  • There is no need to make monthly payments to the lender
  • Spouse of the borrower can stay in the house after the borrower dies even if he/she is not a co-borrower

Cons:

  • The borrower needs to pay the costs related to the house such as maintenance, property tax, and home insurance premiums
  • Home is a crucial asset and mortgaging it takes the asset out of your folio
  • A reverse mortgage may entail higher fees and charges

How to Get Reverse Mortgage?

There are many reverse mortgage lenders in the market, but if you wish to go for a more economical option, you should go for FHA’s Home Equity Conversion Mortgage (HECM). The Federal Housing Administration insures these.

These are insured by the Federal Housing Administration. You must have a substantial amount of equity in your home from which you can draw the mortgage. Unlike a forward mortgage, LTV is not calculated in case of a reverse mortgage; only the home’s equity decides the amount of loan. The lender would also want you to attend counseling with an HUD-approved counselor. They provide unbiased information about the mortgage you are seeking so that you understand all the terms and conditions plus the costs associated with this loan.

There are three ways how you can receive the loan payments-

  • Lump Sum wherein you will get all the money at once
  • Periodic Payments under which you can choose to receive regular payments say, monthly.
  • Line of Credit which allows you to draw money when you actually need instead of getting all the cash at once

Reverse Mortgage Fees and Charges

A reverse mortgage entails servicing fee which may range from $25 to $35 per month along with the interest rate and several other fees and charges. You may need to pay for some other expenses related to the house including the origination fee, appraisal, insurance premium and costs of house maintenance. Document preparation, certification, recording, etc. will lead to more costs. You can use a reverse mortgage calculator to get a fair estimate of how much extra money you would have to shed.

Many banks provide reverse mortgage solutions to older people, but you should never get the first offer that comes your way. Shop around to get the best interest rates and find a lender whose terms and conditions best suit your financial requirements. You can read out more exciting blogs on Afinoz.com.

Find out here how a personal loan is different from home equity loan and credit card