If you have asked yourself what is a reverse mortgage at any point in time you are probably an elderly person needing some income or a young buck in the mortgage industry.
Definition of a Reverse Mortgage:
A reverse mortgage is a home loan that provides cash payments based on home equity. Homeowners normally “defer payment of the loan until they die, sell, or move out of the home.”
How Does a Reverse Mortgage Work?
First the lender must determine the loan amount. They will take into account the value of the home, age of the borrowers and the interest rate. Usually the loan amount will be about 40% to 60% of the value of the home.
Once the lender knows what you qualify for, they will need to know how you want to get your money. The closing costs of the loan will be rolled into the loan itself, so you need not worry about paying any lump sum for closing costs. Therefore the starting cost will be equal to the loan amount plus closing costs, plus any other funds taken at closing.
Reverse Mortgage Tenure Scenario
If you have your home paid off, you can choose to take your loan in the form of tenure which is a monthly payment made to you. The funds from this type of payment are tax free. Each month you would also receive a mortgage statement which will show you:
- Prior month’s loan balance
- Payment amount to YOU
- Interest and insurance charged
- The new loan balance
Reverse Mortgage Line of Credit Scenario
If you’d like all of your loan funds ready as you need them in a line of credit. In this scenario you will receive each month:
- Existing loan balance
- Funds previously available
- Any withdrawals taken
- New available line of credit
The coolest feature of this scenario is the available line of credit grows over time! A reverse mortgage line of credit taken at $100,000 today would be worth $104,000 next year.
Does a Bank Make Money on My Reverse Mortgage?
Of course they do. They are bank and that’s what they do! The banks and investors are patient and they wait. Usually the heirs will sell the home, pay off the reverse and the banks make money.
A Reverse Mortgage is a Non-Recourse Loan
This means that if proceeds from the sale of the house are not sufficient to pay off the home when the loan is complete the bank has no recourse to the mortgage or heirs for the shortcomings.
Why Would A Senior Get A Reverse Mortgage?
- Eliminate current mortgage and payments
- Supplement their retirement income
- Remodel or repair their home
- To pay property taxes
- To Cover extreme health care costs
- To Pay for long term needs
- To get their house out of foreclosure
What are the eligibility requirements of a reverse mortgage?
- Borrowers must be 62 or above
- Borrowers must be free and clear or be able to pay off the current mortgage with the equity
- Must be in the first mortgage position
- Must be a single family, or 1 to 4 unit owner occupied home
- Townhome, detached homes, condo units, PUDs and some manufactured homes are eligible
When do I repay my reverse mortgage?
- You must repay a reverse mortgage in full when the last surviving borrower dies or sells the home
- You let the property deteriorate beyond reasonable wear and tear and you do not attempt to fix it
- All borrowers permanently move to a new residence
- The last surviving borrower fails to live in the home for 12 months in a row because of physical or mental illness.