How can you get cash out of your home? One way is to sell – but then you have to move. Another is to take out a home equity loan. But you’ll have to pay it back.
The third option—for those 62 and older, at least—is a reverse mortgage, which requires neither a move nor loan payments. Reverse mortgages are gaining in popularity, but are not well understood. They are like conventional mortgages turned upside-down, and the concept is a little difficult at first.
Both conventional and reverse mortgages create debt against your home. But they’re distinct for a couple of important reasons. A conventional mortgage is a falling-debt, rising-equity transaction. Reverse mortgages are based on a rising-debt, falling-equity model.
With a reverse mortgage, the lender sends you cash and you make no repayments, so your debt increases and your equity shrinks. When a reverse mortgage becomes due and payable, all of your home’s value will have been turned into loan advances, loan costs or leftover equity.
While that notion might seem alarming, remember that’s precisely what reverse mortgage borrowers are after: the ability to “spend down” their home equity while they live in their homes, without having to make monthly loan repayments.
A reverse mortgage comes due and must be repaid when you die, permanently move out (to live with a family member or to a nursing home in most cases) or sell. Otherwise, you’re free to stay in your home as long as you wish. If you pass on, your heirs can pay the loan back, with interest, and keep your home. Alternatively, they can sell it to a third party and repay the lender out of the proceeds (any excess goes into your estate).
You don’t need a minimum income to qualify. You could have no income or even still owe money on a conventional mortgage. In fact, some seniors get reverse mortgages to pay off a first mortgage.
The only eligibility requirements are that you are at least 62 years of age and treat your home as a principal residence. (If you own your property jointly, the other owner(s) must sign on to the loan, too.)
How much can you get?
The amount of cash you can receive from a reverse mortgage generally depends on:
- the specific reverse mortgage plan or program you select
- your age
- your home’s appraised value
- interest rates and closing costs on local home loans
- other costs of the loan
You can take receipt of the loan in whatever fashion you choose, including a one-time lump sum, a line of credit, fixed monthly payments for a predetermined period of time or a combination of the above.
Reverse mortgages are offered by banks, mortgage companies, savings associations and state and local governments. The funds from private-sector loans can be used for any purpose. Government loan programs generally limit spending options to specific purposes, such as home repairs or property taxes. Many public-sector loan programs are only available to homeowners with low or moderate incomes.
Private reverse mortgages are subject to a variety of costs. They may include:
- an application fee
- an origination fee
- closing costs
- a monthly servicing fee
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