How a Reverse Mortgage Can help you Reorganize Your Finances
Are you contemplating retirement but have doubts about your financial status and your ability to survive comfortably? Well, if you have been weighing your assets and wondering whether they are enough to get you somewhere, there is one more place that you can look, your own house. Reverse mortgages are reserved for seniors over the age of 62 who have home equity. The difference between this mortgage and the regular mortgage is that you will not have to make monthly payments for the home because the loan is paid out when you eventually move out of the home or pass on. There was a time when reverse mortgages were considered the last resort in all financial plans, however, they are now becoming a very useful retirement financial tool for seniors.
A brief history of reverse mortgages
In 1989, the first reverse mortgage was introduced in the country; the home equity conversion mortgage (HECM). The plan was to allow seniors to benefit from a percentage of their home equity without necessarily having to move to a new place. The ideal client for a reverse mortgage is a person who:
- Does not plan to move
- Cannot afford the recurrent costs of home maintenance
- Needs to access a part of their home equity as money they can use for emergencies
There are people who even use a reverse mortgage to pay off the remaining portion of a regular mortgage on their home so that their cash flow can improve. For some people, the motivation is repaying debts as they head into retirement while for many others, it is brought about by unexpected expenses.
How the Mortgage works
The normal mortgage situation normally involves you as the borrower making payments to the lender. In the case of reverse mortgages, it is the lender who will make the payments to you. You choose how and where the money will be deposited on a monthly basis. When you move out of the home or pass on, the home will be sold, and proceeds of the sale will go towards paying off the money lent to you. If there is any money left after the sale of the home, it goes to you as the homeowner or your heirs. There are cases where heirs choose to pay off the mortgage from other sources so that they can keep the home. Most of the time, this decision stems from a sentimental attachment to the home.
Different types of reverse mortgage payments
There are different payment arrangements which you get when you apply for a reverse mortgage.
- Term payments: you and the lender decide on a term like say ten years. The amount to be lent is divided into equal portions to be paid out throughout the said term.
- Lump sum Payment: This can be made in situations where you are looking for a large sum of money to offset a mortgage, pay health bills or a similar expense.
- Line of credit: This is an arrangement where the money will be available for you to borrow whenever you need it. Under this arrangement, you will pay interest on the amounts borrowed from the line of credit.
- Equal monthly installments: this is a kind of arrangement whereby for as long as you live, you will get a certain amount of money deposited to your account from the lender.
There are arrangements which allow you to have monthly payments and a line of credit or term payment and a line of credit. A discussion with the lender will help you understand the options available so that you can pick the one which suits you the most.
Eligibility criteria for the loan
There are certain conditions that you must meet in order to access the reverse mortgage:
- The applicants must be older than 62 years
- The applicants must be living in the home in question as for their primary residence before applying for a reverse mortgage on it.
- Property types allowed include single-family homes, an FHA condo or a townhome
- Before borrowing, you have to prove that you have not defaulted on federal debt
- You will be needed to go through comprehensive HECM counseling, where you will be guided through the terms of the loan and what they could mean for you.
There are criteria that are used to determine the maximum amount that you can borrow against your home. The factors which will influence the decision include the age of the youngest of the borrowers at the time the loan is being borrowed, current interest rates and the value of the home after an appraisal. Most old people do not realize how much equity their homes hold, and they get into retirement with huge financial burdens which can be simply offset by getting a reverse mortgage. When executed and handled properly, it is one of the best ways to reorganize your finances and get steady income after retirement.