If you’ve been looking into home loans, you may have heard about a type of loan known as a “reverse mortgage.” You may be wondering what this loan is like, and whether or not it’s something that could be a good choice for you.
Reverse mortgages are a type of loan designed specifically for homeowners over the age of 62. It allows people to take their home equity and turn it into cash. Instead of making a monthly payment, a homeowner will receive cash payments based on the value of their home.
In some cases, this money will be used to cover the cost of a mortgage payment. In other cases, the homeowner will simply receive money that will help them to cover their basic expenses. From a legal standpoint, there isn’t any kind of restriction on how these loans can be used.
These loans were specifically designed to help retirees gain an additional source of income. Many elderly people simply don’t have the money they need for their day to day expenses, and a loan like this can make sure they can pay for everything that they need to.
What’s especially great about these loans is that they don’t need to be paid back as long as the loan recipient is still living in the property. Homeowners do need to keep up with their property taxes and insurance, but they don’t need to have to pay off their loan payments as long as they remain in their home.
Before applying for one of these loans, the recipient must take a counseling course. In the course, they’ll receive advice on how to use their money efficiently, as well as important information about money management. This ensures that everyone who receives one of these loans is able to benefit from it.
In most cases, senior citizens choose to get these loans because they are experiencing significant money difficulties. The money they receive helps them to stay in their home and to take care of all of the expenses that they need to cover.
The amount of money a person can get for one of these loans is determined by a number of factors, including the value of the home itself and the age of the recipient. For example, the initial principal limit is lower for a person who is 65 than it is for a person who is 85.
There are several different ways in which the loan money can be received. Seniors can get a lump payment at the time the loan paperwork is signed, a line of credit that they can use to pay for various expenses, or monthly payments that are sent to them for the rest of their life. Many people get a combination of these three things.
For example, someone might get $2000 of their loan money upfront to help them cover various expenses, and then get monthly payments sent to them from that point on. This helps people to regain and maintain their financial standing.
The payment on the loan is typically due when the borrower dies. Their families will be the ones responsible for the payment. Many families willingly take on this burden in order to ensure that their loved ones have all the money they need.
However, if the recipient decides to sell their home or moves out of it for more than 12 months, the payment will be due at that time. Some people opt to get a reverse mortgage until they’re ready to move into an assisted living facility. They then use the money from the proceeds to pay off their loan so that their family members don’t need to worry about it.
Some people have criticized these loans for a number of reasons. For example, there are people who say that the terms of the loans are confusing, and that seniors don’t understand what they’re agreeing to. There are others who claim that the interest rates on these loans are too high.
But while reverse mortgages have their detractors, there are also plenty of people who sing their praises. For many seniors, these loans are what keep them out of property, and allow them to enjoy the final years of their life in comfort. They allow people to take advantage of the home equity they’ve built up and live out their retirement in peace.
Reasons to Avoid a Reverse Mortgage
With increasing numbers of individuals reaching retirement age, more and more people are searching for creative solutions to funding their golden years. As a result, the concept of the reverse mortgage has gained real traction of late. This particular financial tool does offer some seniors certain features which make the idea appealing, though it is important for anyone considering such a decision to familiarize themselves with the potential downsides of reverse mortgages.
The fundamental concept of a reverse mortgage is that a homeowner 62 years of age or older can secure a loan on their residential property that does not need to be repaid until they die or leave the home permanently for some other reason. There are no credit score or income requirements involved in getting such a loan and no payments are due provided the borrower still lives in the home and meets all eligibility criteria. Borrowers receive non-taxable monthly payments, a line of credit or a lump sum amount which can be used for living expenses, debt repayment or really any other purpose.
While the above features sound beneficial to many, there are indeed several potential drawbacks that everyone should keep in mind prior to making the decision to seek a reverse mortgage. One of these has to do with the often high interest rates and fees accompanying these loans. Considering that reverse mortgages are granted without reference to a borrower’s income or credit standing, it should come as no surprise that they tend to come at elevated interest rates. In addition, origination fees and other costs tend to be much higher than those related to more conventional mortgages. Ultimately, these costs will cut into the proceeds realized from taking out such a a loan.
Another element of a reverse mortgage many fail to consider is the fact that it may cause complications down the road if you wish for the home itself to remain in the family. Passing a family home down to the next generation is something many of us desire, but if a reverse mortgage has been taken on the property, things could become difficult for the intended heirs. Because this type of loan must be repaid when the homeowner dies or leaves the property, the home may need to be sold in order to do that. If the heirs want to keep the home, they will have to find a way to repay the loan themselves, a burden you likely did not intend for them to bear.
Another facet of a reverse mortgage many may not fully understand is the fact that death is just one of the events that can trigger the need to repay the loan. If for some reason the borrower leave the home for more than 12 months, perhaps due to extended time in a rehabilitation facility or nursing home, the lender may decided that the eligibility requirements are no longer being met. Under such circumstances, it will be necessary to sell the home or find a way to pay the entire balance.
It is also essential for prospective reverse mortgage borrowers to understand that the balance on their loan will continue to increase over the remainder of their lifetime, due to the accumulation of interest. When it comes time to repay the loan, this could represent a surprisingly large chunk of the total estate that was intended to be left to the homeowner’s heirs. This can work to significantly undermine the intentions of the homeowner and the legacy they meant to leave to their loved ones.
A final consideration which may give many seniors pause when it comes to taking out a reverse mortgage is the fact that such loans can impact eligibility for Medicaid and similar government assistance programs based on financial need. If a borrower receives too large a payment from the lender in a given month and does not spend it, their ability to keep receiving some kinds of assistance may be hampered. While this is not the case with regard to Medicare or Social Security payments, those dependent on Medicaid should tread very carefully.
For some, a reverse mortgage may provide a workable way to stay in a much-loved residence for the remainder of their lives. However, the risks and downsides attendant to such loans must be given serious consideration by anyone thinking about using what is likely their primary asset in such an unconventional way.
More Information About How Does a Reverse Mortgage Work?
If you’re a senior citizen who needs an additional source of income, a reverse mortgage is definitely something you’ll want to consider. Talk to your bank and see what kind of loans are available to you. From there, you’ll be able to decide if this is something that you’ll want to proceed with. If you need some extra income, this loan can help you get it fast.