What are Reverse Mortgages?
You’ve probably heard a lot about reverse mortgages, as they are a popular, safe, simple way to supplement seniors’ retirement income. Before you get started, you need to understand the benefits and disadvantages of getting a reverse mortgage. If you decide a reverse mortgage may be the right answer for you, follow some planning tips to help make the loan process easier.
People tend to shy away from the very idea of reverse mortgages, in part because of their former bad rap, and in part because of all the scary terminology. When someone starts spouting off about how you can “utilize the equity in your home on deferred payments with a conversion mortgage,” chances are pretty good you’re going to tune it out.
Reverse mortgages pay you to continue living in your home. You can think of your home as the Bank of You: You’re borrowing money that you would have earned had you sold your house. You can then use the money for whatever you want. Anything your heart desires (and your wallet can handle) is yours for the taking, whether it’s a vacation in Switzerland, moving your master bedroom to the first floor, or sending yourself to college!
The concept is kind of abstract if you’ve been paying a lender for the past 30 years or so, and it may be difficult to grasp at first. Take a look at the quick reference points below:
- You’re a homeowner who owes little or nothing on your home. You decide you need more money to live the lifestyle you want, but your biggest asset is your home and you certainly don’t want to sell it to get the money you need.
- A reverse mortgage lender figures out how much it can lend you based on your home value, your age, and interest rates, and loans you some percentage of the money you would have gotten if you’d decided to sell your home.
- You still own your home and continue to live in it, but now you’re getting payments from the lender, so your cash flow problem is solved.
- You pay the loan back (with interest) only when you don’t live in the house full time anymore, usually due to moving out or death.
- You never owe more than your home is worth, no matter how much you’ve accumulated in debt.
- You keep any leftover equity after the sale of the house; if you owe the lender $67,000 and your home sells for $200,000, you put the difference in your pocket and walk away smiling.
A reverse mortgage is sometimes called a deferred payment loan, and for a very good reason. Instead of paying off the home loan as you borrow money, the payments are put off (deferred). This is why reverse mortgages can be such a good choice for seniors; when you’re on a fixed income or living off of your savings, it can help to have some extra cash in hand to supplement.
A reverse mortgage can be a lot of things: a way to make ends meet, a nice chunk of change for a rainy day, a fabulous dream vacation, or a remodeled kitchen. But there’s one thing it’s definitely not — free money. There’s no free lunch here.
While reverser mortgages allow homeowners who are at least 62 years old to borrow against their home’s equity and still maintain ownership of the home, your loan will need to be paid back, just like any other loan whether it’s due when you move or upon your death.
There are fees involved that can include payments to the originator, the appraiser, postage fees, recording fees . . . the list goes on and on. (These are the same sort of fees you paid for the mortgage that bought you the home you live in now.) You also have to pay interest on your loan, which is generally right around the interest rates on traditional mortgages. You only pay interest on what you borrow, so any money that you don’t use from your pool of reverse mortgage funds isn’t charged.
A reverse mortgage is also not a direct value-to-dollar loan. You are loaned a percentage of your home value, based on age, interest rates, and area. Don’t expect the full value of your home, or you’ll be very disappointed. Before you make plans to spend money you don’t yet have, go online and click on the reverse mortgage calculator. This very cool tool from the National Reverse Mortgage Lenders Association gives you an estimate of what you may be able to borrow.
Lastly, a reverse mortgage is not an all-encompassing loan that’s right for everyone. Just because you qualify by being a 62-year-old homeowner doesn’t mean you’re an ideal candidate. To find out whether or not a reverse mortgage is right for you, here are a few of the basic questions you can ask yourself:
- Are you at least 62 and own your own home?
- Do you plan to be in your home for at least 5 years?
- If you’re getting the loan to purchase or pay off something specific, have you looked into other options for financing those expenses?
- Are you comfortable with the terms of the loan?
The more of these questions you can answer “yes” to, the more ready you are for a reverse mortgage.