Do you wish you could access more of your home's value? Do you need supplemental income to live? Do you own your home outright or have significant equity already?
If you answered "yes" to any of these questions, a reverse mortgage is one option you'll want to consider. Keep reading to learn more.
What Is a Reverse Mortgage?
A reverse mortgage, also known as a home equity conversion mortgage, is a type of mortgage that works opposite of the way traditional loans work. Created to provide a monthly income for senior citizens who own their own homes, reverse mortgages allow older individuals and couples to access their home equity without leaving their homes.
To qualify, borrowers must be 62-years-old or older, own a home with significant equity, and live in the home they intend to mortgage. Borrowers must also participate in a counseling session with HUD to learn more about how reverse mortgages work and commit to maintaining their home.
Since the goal of a reverse mortgage is providing income to survivors who still live in the home, it's important to note how reverse mortgages are repaid. Once the remaining survivor who lives in the home passes away or quits using the home as their primary residence, the cash value, interest, and finance charges resulting from the loan must be repaid. According to the U.S. Department of Housing and Urban Development, however, any remaining equity can be transferred to heirs. Further "no debt is passed along to the estate or heirs," they write on their website.
While each loan can have its own set of stipulations, most reverse mortgages culminate in an estate sale or remaining survivors re-purchasing the home.
According to HUD, eligible homes can fit several different levels of criteria. For a FHA HECM, qualifying homes must be a single family dwelling or a "2-4 unit home with one unit occupied by the borrower." Some condominiums and manufactured homes can also qualify if they meet FHA standards.
As part of the lending process, you'll likely have a thorough home inspection. If major repairs are required, part of the proceeds of your loan must be set aside to make those repairs. Most of the time, you cannot move forward with your reverse mortgage until your home is brought up to the standards required by your reverse mortgage lender.
Who Is a Reverse Mortgage Good For?
The fact that reverse mortgages are only offered to individuals ages 62 and up says it all. By and large, reverse mortgages are best for older individuals who have plenty of home equity but not enough cash. By applying for a reverse mortgage, these individuals can access the equity in their homes and receive monthly cash payments or cash in a lump sum.
Because reverse mortgages allow older individuals to access their home equity without moving, they gain access to cash without changing their housing situation. Obviously, this is a huge perk for anyone who needs the money locked in their home's value, yet doesn't necessarily want to move. Best of all, the money you receive through a reverse mortgage is tax-free.
It's important to note, however, getting a reverse mortgage doesn't get you off the hook when it comes to taxes and homeowner's insurance. You'll still need to pay those costs as they arise, as well as keep your home maintained and in good shape.
Keep in mind that, like any other loan, interest accrues when you take out a reverse mortgage. If you're in the market for a reverse mortgage, it's smart to shop around for the best loan and rates.
With the right loan, you'll receive the highest monthly payments possible with minimal expense. The best reverse mortgages also come with the lowest origination costs and closing fees.
At the end of the day, a reverse mortgage can be a good idea for older folks who want to maintain their standard of living while accessing a great part of their wealth – their home equity. To find out if a reverse mortgage is right for your situation and get a free quote, check out this comprehensive guide.