A reverse mortgage is a way of releasing equities that are tied up to a house or any such physical assets. The equities are converted into cash figure and offered as a loan for the aged people (generally who are over 60). The mortgaged loan is available in either lump sum that can be received over an agreed upon term or throughout the entire life. You can also request for a combination of two if you wish so.
In case of normal mortgage loan, after every authorized payment, the equity value will increase by the amount paid off to the lender. When the entire amount is paid-off in full, your property will retain the full equity value. But when it comes to reverse mortgage, the homeowners are not obliged to make any payments. However, the option of pre-payment penalties is open to them.
There is much similarity between lien of credit and revolving credit line as far as the process of working is concerned. Whenever there is reduction in a lien, it will increase the available credit by the same volume. The accruing interest adds to the mortgage balance.
The idea of a reverse mortgage!
Putting in simple terms, reverse mortgage is a loan available for homeowners, generally who are 62 years or older. The reverse mortgage allows people to convert part of their equity in their homes into cash.
Now, you are wondering about the need for a reverse mortgage! Indeed, the idea was majorly to help retirees with limited income, and they use the product to cover the basic monthly lovely expenses or paying for healthcare. It is called a reverse mortgage because, unlike the traditional mortgage, the lender has to make payments to the borrower. In the general mortgage scenario, the monthly payment is made to the lender. Here, the borrower is not required to pay back the loan unless and until the home is vacated or sold. Interestingly, as long as the borrower is living in the home, the person is not required to pay any monthly payments towards the loan balance. However, the borrower is advised for being regular and current on homeowners’ insurance, property taxes and homeowners association dues, if applicable.
With time, there may be a substantial increase in property value. In that case, it is possible to acquire a second or third mortgage if the enhanced equities permit you to do so. However, this facility is offered by a few lenders as the reverse mortgage balance tends to increase with time. The borrowers are allowed to refinance reverse mortgage if there is adequate amount of equities in home. Streamline refinancing is also possible in the event of interest rate reduction. The reversed mortgage line increases in volume and so the recorded figure is usually much greater than what was at the time of loan closing.
Most of the borrowers labor under the wrong notion that this recorded lien is actually the mortgaged amount for pay-off. The reality is that the recorded lien works in the same way as the home equity line of credit does. In that case, the maximum lending limit is determined by the recorded figure. The estimation as to how much to pay off depends on the sum of actual disbursements and interest rate.
How much cost to bear for availing reverse mortgage?
The cost of availing a reverse mortgage loan is not a fixed amount, rather depends on the particular program you have applied for. The cost includes the expenses for application fee, mortgage registration fee, stamp duty and other government charges, in addition to interest rate. The cost is included in the loan and increases in value with the principal.
The rate of interest for reverse mortgage is of two types – fixed and variable. Apart from these expenses, you need to pay for monthly service charge that is applicable to your loan balance.
Do the borrowers need to pay for insurance and taxes?
Yes, they need to spend for whatsoever is required for tax and insurance. As the borrowers retain the title of their property throughout the loan processing and receiving, so they are under obligation to bear the expenses for property maintenance.
What is the most common type of reverse mortgage?
The Home Equity Conversion Mortgage is the most common type of reverse mortgage that is being known among the eligible people. Indeed, it is a special type of home loan that is applicable only for homeowners who are aged 62 and older. Yes, there are some similarities like that of mortgage loans.
You are allowed to borrow money using your home as a security for the taken loan. Just like the normal mortgage loans, the title remains in your name.
You do not have to opt for monthly payments for paying back the loan amount, unlike the regular mortgage loans. Indeed, that automatically gets repaid as the person vacates the home. It is to be noted that the fees and interest are added each month to the loan balance, and the balance grows in the given time. With the terms of the reverse mortgage loan, the homeowners are required to use the property as their principal residence and the house where they are residing in good condition.
The main difference that differentiates the regular mortgage loan and the reverse mortgage loan is the amount accumulated as the balance goes up and not down, as you may see in the traditional mortgage loans. As your loan increases, your home equity decreases.
Remember that the reverse mortgage loan is not free money, and it may seem more than a loan too! It is a loan where everything is added, the borrowed money+fees each month +interest. And that makes the sum of the balance as that of a rising one!
Watching out for scams related to reverse mortgages!
There are many contractors who approach you about getting the reverse mortgage done, majorly repairs for your home. Beware, it may be a scam. Do not get pressurized into getting a reverse mortgage loan.
Scams targeting veterans
You may know about the department of veteran affairs (VA), and it does not offer any mortgage loan. Some of the reverse mortgage ads and deals falsely promise about the veterans’ special deals. It can imply a VA approval or may also offer a “no-payment” reverse mortgage loan to attract the older group of Americans who are desperate to sell their homes.
Do you know you have a three-day time for canceling a reverse mortgage?
In most of the reverse mortgages, you are given a three-day time; that is three business days after the loan gets closed to cancel the deal for any reason you have. And this process is generally without penalty. This right is also sometimes termed as the right of recission! You just have to notify the lender in writing for canceling the reverse mortgage loan.
It is advised to keep copies of all the communication that took place between you and the lender. After the reverse mortgage loan is canceled by you, the lender has a required time for returning any amount of money that you have paid for the financing. It is generally set at 20 days. You can always seek legal help if you feel there is nor reason to cancel the loan after the three-day period.
The bottom line
Indeed, in conclusion, it is important to know whether the reverse mortgage loan is right for you or not! Yes, a reverse mortgage loan can be a great option for your retirement. But it may not be the right option always. To determine the applicability of the loan, you can go through some of the questions like how you will use the loan, will you run out of money in the future, and many more!