Ever wonder how a reverse mortgage works? For folks that have lived in their home for a long time, they may very well be sitting on a gold mine. Home prices have increased greatly over the last thirty years, and nationally have nearly doubled in value over the last ten years. This has left a great many homeowners with valuable equity in their homes and many different options to access that equity, home equity loans and mortgage refinances being the most common. For older Americans, there is another, less common option that is growing in popularity as home prices have increased and baby boomers have moved closer to retirement age: the reverse mortgage. But do you know what it is, and do you know how a reverse mortgage works?
So what exactly is a reverse mortgage? A reverse mortgage is a loan product that allows homeowners 62 years of age and older to use their equity to generate tax-free income, without having to sell the home or take on a new mortgage payment. In fact the reverse mortgage is exactly what the title states, the reverse of a standard mortgage. With a standard mortgage, the borrower (or homeowner) makes monthly payments to the lender (or bank or mortgage company), in order to pay back the loan that the lender originally lent to for the purchase or refinance of the house. This payment includes interest that the lender charges the borrower for the loan. In a reverse mortgage, the situation is reversed; the lender makes monthly payments to the borrower. However, in both a standard and reverse mortgage, the lender secures their loan amount by using the house as collateral.
There are a few factors that determine how much money a borrower will receive from a reverse mortgage, such as the value of the home, borrower’s (and co-borrower’s) age, current interest rates and any lending limits that may be standard for your geographic area. As a rule of thumb, the older the borrower and the more valuable the home, the larger the available loan amount. Homeowners can choose how they want to receive their payments, either as a lump sum, monthly payments or as a line of credit. The line of credit is the most popular option, with nearly 60% of reverse mortgage borrowers choosing to the option to draw income or a lump sum off the line at the time of their choosing. And the proceeds from the reverse mortgage can be used for anything, completely at the discretion of the borrower, though most borrowers use the funds for home repairs or modifications, health care expenses, to settle other debts, or for their long-planned vacation! Reverse mortgages are available for nearly all property types with the exception of co-ops, though co-op owners in some metropolitan areas, specifically New York, should have local options. If you are in retirement, or nearing retirement, and think this may be the product for you, I will go into more detail about exactly how a reverse mortgage works.
For reverse mortgage borrowers with an existing mortgage, that mortgage will need to be paid off completely, so that the new reverse mortgage will be the only lien on the house. If the proceeds from the reverse mortgage are not ample to pay off the existing mortgage, the borrower will need to access savings or other sources to pay off the rest of existing mortgage amount. In this scenario, the borrower won’t have access to any additional funds from the reverse mortgage; however, they will no longer have a mortgage payment! The more common scenario is one in which there is a small or no mortgage on the home and then the borrower is able to access nearly the full amount of the reverse mortgage to use at their discretion. No monthly payments are due on the loan and the loan is repaid when the moves or sells the home, passes away, or ownership otherwise changes hands. If the home is sold and the proceeds of the sale exceed the mortgage amount, the balance belongs to the borrower or their heirs.
One very important facet of the reverse mortgage process is the consumer counseling that is required for borrowers contemplating a reverse mortgage. Your lender can help you find counseling agencies and most programs are approved and monitored by HUD and/ or AARP. The counseling is required to make sure that the terms and risks of the program are clear to you. Counselors are obligated by law to review with you all of the implications of the new mortgage, and what your potential options are.
Overall, for older Americans contemplating a stress-free retirement, the reverse mortgage may be just the option! Just make sure that you know your options and goals… and how a reverse mortgage works.
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Justin has 5 years of experience as financial adviser; his key areas are consolidation, insurance, debt relief, mortgages etc. For more free articles and advice visit http://www.Bills.com.
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It is usually used by Seniors as a method of borrowing against their home equity.
Most financial professionals will not recommend it out of a number of possible options. The only ones who really push it, are those selling it.
First of all, you have to meet a certain age limit to be qualified for a reverse mortgage. Depending on the program or lender would determine the age limit, however I do believe it starts at retirement age.
Secondly, the lender will only payout to a certain percentage of the value of the home. Again, this depends on the lender and the program. Most will perform to 50% of the value of the home. I have seen some as low as 40% with some being as high as 60%.
Third, the monthly income would determine the life expectancy of the individual. If the person is 66 years of age with a life expediency of 85, then there is 19 years that they will receive payment (as long as they do not exceed the value threshold).
So the example would be this:
Example 1
500,000 value owned free and clear
250,000 dollars allowed to be drawn on
1,094.49 dollars in income(19yrx12m=228m/250,000 dollars)
Example 2
500,000 value w/ 100K lien
150,000 dollars allowed to be drawn on (100K-250K (50%))
657.89 dollars in income (same formula as above).
Each time a payment is conducted, you will incur interest on that payment that will be compounded monthly. Hence the reason for the low LTV (loan to value) ratio.
Once the borrower passes away, you will have a certain amount of time to repay the lender back. In most cases it will be 90 days once it has gone through probate. Repaying back the loan with in 90 days either through selling the property or refinancing the property if you decide to retain the property.
Another item that you will want to consider will be the closing cost of the reverse mortgage. Closing costs are typically much higher than your traditional mortgages. In some cases it might be double to triple the normal cost. Again, that depends on the lender that you work with.
I have worked with a few people that where looking into the reverse mortgage program, that ultimately decided to finance using another program that is not a reverse mortgage. Ultimately it coomes down to cash control. You need to find a program that allowes the freedom of cash control to obtain your goals (traveling and enjoying the remaining years of your life). However, you do have a lot of home work to do in researching your options.
Contact me directly if you have any questions. Hope this helps…
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A "reverse" mortgage is a loan against your home that you do not have to pay back for as long as you live there. With a reverse mortgage, you can turn the value of your home into cash without having to move or to repay the loan each month. No matter how this loan is paid out to you, you typically don't have to pay anything back until you die, sell your home, or permanently move out of your home. To be eligible for most reverse mortgages, you must own your home and be 62 years of age or older. More information about reverse mortgages can be found here……
http://reversemortgageresource.blogspot.com
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Basically you take out a loan against the value of your home. The bank gives you cash in return for a payment that they expect when the owner dies, sells the house or vacates the home.
Unlike a traditional mortgage, the home owner makes no monthly payments. All the interest on the amount the bank lends you is added to the lien on the property and it's all paid out upon those events I mentioned.
These used to be marketed to older people who need immediate funds to live on, but don't want to retain the equity in their homes for their estates or future generations. Thing is, they are under some scrutiny for marketing and pricing practices. Make sure you do some research and understand fully the consequences…
needs to be primary residence
Perfect.
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Hello,
No, you will not lose your house.
Here is a short definition of reverse mortgage:
A reverse mortgage (or lifetime mortgage) is a loan available to seniors, and is used to release the home equity in the property as one lump sum or multiple payments. The homeowner's obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves (e.g., into aged care).
So you will not lose your house till you die.
A reverse mortgage basically allows you to retain ownership of the house and receive money, either lump sum or payments. The money received is basically a loan which is paid off either on your passing or the sale of the house. You never need to pay on it while you are alive and living in the house but it does accrue interest. You must be 62 or older to qualify for a reverse mortgage.
The major difference between a reverse mortgage and refinancing is income. For a reverse mortgage you don't need to show or receive any income where as a refi you have to prove you can make the payments. With a reverse mortgage there are requirements to keep homeowners insurance and the house in good repair.
There is so much more to go into. A good loan officer should be able to help you better understand your situation and what the two options would look like. Please let me know if you have any questions.
…here's a very very "simplistic" answer… You currently own the home… "they" give you all the "equity" back for you to use anyway you want… a BIG cash payout… "dribs and drabs" and you don't have to pay it back…ever… however, (here comes the nightmare)… you can't "will" the house to your relatives…when you die the house and property go to the "mortgage co" with a "first refusal" offer to your relatives to pay back the "equity" that you've spent or establish a new mortgage and buy it back or…color it gone…(they keep t and re-sell it).
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When a "lender" gives a home owner an agreed on amount of money per month against the value of the home, and then gets the property at the end of the contract. In most cases the overall price is low, and they are only a good deal if an older person needs cash, and doesn't have a family to leave the property too.