The reverse mortgage is essentially a loan that is given against property to those senior citizens above a certain age. In certain cases, it can also be used to finance the purchase of a new home. The exact age for this will depend on the local jurisdiction and can vary from place to place.
The way it works out is quite simple to understand. Whenever someone opts for a reverse mortgage, what they are actually doing is that they are pledging their property to a bank or some other financial institution, in return for a monetary compensation. This compensation however, isn’t given to them in the same way that it is done in a traditional mortgage. On the contrary, the way it is done is in the form of a monthly payment, which is almost like a salary that the senior citizens use for their monthly expenses.
This however needn’t always be the case. It is not always that the payment is done on a monthly basis. It can be something else altogether, such as a line of credit. It should be noted that while the property would have been technically handed over to the financier as a consideration for the loan, the owners of the property are still required to pay the property taxes as well as homeowner’s insurance.
The banks benefit from this deal a bit more differently than it would in a conventional mortgage. As opposed to seizing the property in case of nonpayment, it works a bit more differently here. The bank simply waits patiently until the people who have taken the loan repay the amount, vacate or die.
In those cases wherein the entire mortgage amount has been paid back, the homeowners can regain the possession of their homes. In cases where they choose to leave, the bank takes over, as would be the case if they would pass away.
As a whole, a reverse mortgage is an excellent choice that is available for senior citizens who are out looking for a home to buy or to take a loan with their existing property used as collateral.
Types of Properties:
SFR, 2-4 units, Townhouses, FHA Approved Condos and Mobile/Manufactured homes built after 1976 are eligible for a Reverse Mortgage.
This is good news, in most cases there are no medical examinations necessary. You do need to own some equity in the home and be over 62 years old.
There will however be a cash assessment to ensure you can keep up with the payments of the running of the property. This includes payment of taxes and insurance etc.
What if I still have a mortgage to pay?
In most cases this will not be a problem at all, if you can pay off what is owed. You can even pay off the remainder of the mortgage with the equity you release on the reverse mortgage. It’s pretty simple, pay off what you have left owing on your mortgage and you will quality for the reverse mortgage.
Will a reverse mortgage affect any social benefits I get?
Okay, so you have Medicare and some Social Security. Don’t worry, the money that you receive from the reverse mortgage will not affect your social benefits in any way at all. I should warn you that if you receive Medicaid or Supplemental Security Income (SSI), the money you get for the reverse mortgage will be used to pay for them. You can read more disadvantages that may arise below in the rest of our Reverse Mortgage FAQ section.
Is There a Lot of Advantages with Reverse Mortgages?
Reverse mortgages are quite popular among senior home buyers. It is favored a lot over the traditional and more generally preferred types of mortgages, because of the benefits that it offers.
Despite all this, there is a lot of confusion regarding what exactly a reverse mortgage is. Since this financing option is only meant for senior citizens above a certain legally prescribed age limit, the general population isn’t given much awareness.
Consequently, the target market also tends to be quite unaware of the exact nature of this mortgaging option being offered. In other words, they aren’t exactly aware of the exact benefits that are being offered by reverse mortgages. The endless pages of legal jargon makes it even more difficult to understand what exactly is being offered by the banks in return for signing the dotted line.
While there will always be individual changes, here are the main advantages of opting for a reverse mortgage:
1.) Tax-Free Benefits
The payments that the home owners receive due to reverse mortgages are given without any taxes applied on them. As opposed to a normal mortgage where state and federal taxes may apply, reverse mortgages are given an exemption under this.
2.) Social Security and Medicare Benefits
There are separate from social security and Medicare benefits. It is not that the benefits that have been accrued by tax relief will be passed on to any form of welfare or anything else.
3.) Retaining Home Ownership
In a normal mortgage, the owners of the property immediately lose possession of their homes in a legal sense until they repay the loan. Even if they live in the same property, they will not be the legal owners; the banks claim ownership to the property as long as the loan remains unpaid. In the case of a reverse mortgage, the property is owned by the residents and will remain until they repay, vacate or pass away.
4.) Purchase a New Home There is an option for home owners to purchase a new property while using the cash flows from the current mortgage. Also, the property that is being purchased cannot be claimed by the banks in any manner.
5.) Make Provision for Inheritance
Since the property is legally in the name of the home owners as opposed to the bank, there is always the option to pass on the property’s ownership to one’s children. The children will still need to repay the balance amount of the mortgage to retain the complete ownership, but the option remains nevertheless.
6.) Financial Freedom
A reverse mortgage provides a monthly income to the owners of the salary. It is essentially a salary that is provided to the owners of the property on a monthly basis, which in turn has the added advantage of being tax-free, compared to a normal salary. This gives the home owners the advantage of having sufficient finances, while at the same time being able to retain a roof over their heads.
7.) No Credit Requirement
Unlike a traditional mortgage where there is a need to qualify certain credit eligibility requirements, there isn’t any such requirement for a reverse mortgage. This makes it a lot easier to access when compared to traditional mortgages. As a whole, a reverse mortgage offers a great deal of benefits to those who opt for it, if properly managed.
Is There Any Disadvantages of Reverse Mortgages?
Reverse mortgages are generally considered to be a great form of financing by most people. This is because it offers an immense amount of benefits to those who are above the prescribed age limit to be eligible to access these financial services.
While there are certainly numerous advantages offered to senior home owners when they opt for reverse mortgages, there is still quite a lot that must be understood before one opts for this particular financial service. Despite the existence of a great deal of differences between different mortgages, here are some of the most important drawbacks that one must consider:
1.) Property Taxes and Homeowner’s Insurance
Despite the property being mortgaged to the bank, the homeowner is still liable for the payment of property taxes as well as the homeowner’s insurance. This can be a bit difficult to certain homeowners, especially if the payments happen to be expensive.
2.) Higher Closing Costs
Unlike a normal mortgage, the cost of closing a reverse mortgage tends to be a bit more on the higher end. This is due to the fact that the closing costs include the insurance premium that applies on the house. The payment of this is done to the FHA or the Federal Housing Administration. Not only are that but there other costs as well which are involved before a reverse mortgage can be closed. In simple terms, the average cost of closing a reverse mortgage loan is a lot more expensive when compared to doing the same with a regular mortgage.
3.) Reduction in Home Equity
There is a marked reduction in home equity when one opts for a reverse mortgage. The application of a reverse mortgage on a property will result in a home equity having a lien placed against it. Until this lien has been paid off, there will be a reduction in the amount of equity that gets passed down through inheritance or exist in one’s existing net worth when calculated. Due to this, a lot of home owners often opt to have the complete amount of the mortgage to be paid off before anything else is done with the property. Failing to do so before the lien has been paid off will result in the property’s overall value getting affected in the long run.
4.) Legal Requirements
There are a lot of legal requirements that have to be taken care of before a reverse mortgage can be provided by the bank. Some of the most important ones are that one uses the property for one’s personal residence as well as maintain it in a reasonable condition. If in case these conditions are not satisfactorily met by the home owners, the home loan may become due. In all, there are certainly a lot of important disadvantages that need to be considered while opting for a reverse mortgage. But this needn’t discourage any senior home buyer from opting out of a reverse mortgage. As long as one takes the necessary precautions and understands the nature of the deal, there is nothing to worry about in any way.
Can A Reverse Mortgage Prevent Foreclosures?
Losing one’s property to a foreclosure can be one of the most painful things that one can ever experience. Since one’s home is usually the largest investment that they would have made in their lives, the loss of it can prove to be a major stress-factor in their lives.
The fact that one is about to lose the roof over their heads and likely be made homeless is something that is a downright scary proposition.
While foreclosures affect people negatively regardless of who they are, the ones who are the hardest hit are those who are elderly. Despite the fact that foreclosures will hit hard everyone who happens to be dealing the situation, those who still have their youth are in a much better position to navigate through these tough times due to their youth and vigor.
On the other hand, the elderly are simply not in a position to cope from the consequences of a foreclosure of their home since they tend to have limited income and more often than not, are physically unable to work to sustain them. It is in this situation that a reverse mortgage can be a great savior.
A reverse mortgage can prove to be a godsend for these people, as long as they qualify for the eligibility criteria prescribed by law as well as have sufficient equity in their homes. These two are by far the most important of all characteristics when it comes to preventing the foreclosure of one’s home.
If one happens to qualify for the reverse mortgage, they can just apply to have the existing mortgage on their property to a reverse one. This will enable the loan on the property to remain, while at the same time preventing their property from being foreclosed by the banks. To begin with, the law requires that the people who are given access to these financial services be above the age of 62 or above. If one happens to be above this age limit, they can qualify to opt for a reverse mortgage.
If they happen to be below this age limit, they will possibly lose the ownership of their home, unless they are able to find an alternative solution.
Furthermore, there needs to be sufficient equity in the home before it can qualify for a reverse mortgage. If in case the equity that is available happens to be insufficient, then it becomes very unlikely that it can be converted to a reverse mortgage.
With regard to actually converting the mortgage to a reverse one, it will probably take a bit of effort. Some banks and financial institutions will not provide for a reverse mortgage. While it is very unlikely, one must accept the likelihood that this could happen.
If such a scenario happens, it is necessary to search for banks that do provide the option and get started with the process of having it converted. If in case the bank offers to convert the mortgage, then it should be immediately opted before any further changes to the equity can possibly take place.
In all, one need not fear that a foreclosure is going to render those homeless, if in case that is a serious possibility. On the contrary, they can simply opt to have the mortgage replaced from the more traditional one to a reverse one. This can help one to retain the ownership of their homes, which can be especially helpful during the golden years of their lives.
Can You Buy a New House with a Reverse Mortgage?
Reverse mortgages are usually opted for the sake of financial security by those who are in their golden years. It is a way in which they can pledge their property to the bank in return, usually for a monthly payment.
They retain full control of the property until they vacate, repay the amount or pass away. With the exception of repayment of the loans, the banks or financial institutions gain ownership of the property eventually.
The above fact regarding reverse mortgages offering financial security to the home owners is something that is quite well known to a lot of people. What is less known is that it can also be used to finance the purchase of a new home. This can prove to be a great source of respite for a lot of old homebuyers, since they simply might not qualify for the more traditional means of home financing through regular mortgages.
This purchase was made possible due to a modification made by the Federal Housing Administration (FHA) to the Home Equity Conversion Mortgage (HECM) program. In the HECM program, a feature was added which allowed for the usage of monthly mortgage payments to pay for the financing of a new house.
This feature gave the option for homeowners to legally transfer the mortgage payments from their existing property as monthly installments of their new property. The reason that this change was made was to ensure that homeowners above the prescribed age limit would be able to manage their housing needs, as per how they deemed it to be fit.
One of the most common scenarios that one often uses this strategy in cases where one would require to be housed at a place that is closer to places of need like hospitals, adult care centers, shopping malls, etc. Then again, another need which could be a likely cause is that they chose to move in to a cheaper house, which would better suit their existing financial needs.
The advantage of this is that one is able to essentially gain a new home with almost no expense going from their savings. The purchase of the new property is made entirely through redirection of the mortgage payments.
What would have otherwise required the average home buyer to pay monthly payments from salaries or any other sources of income, has now been covered by an automated payment at no cost to the homeowner. As a result of this, there is the advantage of being able to buy a home in one’s old age, without having to worry about finding a way to finance it.
As a whole, reverse mortgages can help one out to finance the purchase of a new home. This is especially beneficial to those people who desire to own their own home, during a time in their life when they aren’t in a position to opt for a regular mortgage like other homebuyers in the marketplace.
It is certainly an excellent addition to the Home Equity Conversion Mortgage (HECM) program by the Federal Housing Administration (FHA).