A reverse mortgage is essentially a loan you take out against your home, with your home as security for that loan. The title of the property will remain in the owner’s name. Unlike traditional mortgages, in which you make any payments to reduce your liability, in this instance, you can consider the reverse mortgage as an income stream from your house. The loan will be due for full payment when you move or die. If you move you can also use another reverse mortgage or even sell the house. You can even leave it to your children.
How does it work?
First, you must decide if you want to take out a loan against your house. In this instance, the lender is called a "reverse mortgage servicer". The lender can be an insurance company, a bank, or even your original financial institution or lender. The servicer will then work with you or your broker to set-up the guidelines for administering the reverse mortgage.
Generally you will pay interest on the loan which you have now taken, but it will be lesser than the interest that comes with a regular mortgage. The interest is tax-deductible and it will be based on the fair market value of your home. If you don't pay the mortgage, your assets could be exposed to liens by the servicer in a bankruptcy proceeding.
A reverse mortgage is a loan and it may be seen as
Money Borrowed + Interest + Monthly Fees = Your Loan Balance
The homeowner or heirs will have to pay back the loan eventually. This usually happens by placing the property up for sale. Remember, the house has equity, but this equity will be gradually decreasing over time.
Key Features Of A Reverse Mortgage
Access to your home’s equity
You can choose how to access the equity in your home. There are three types of ways to draw down on the cash. These can be via a lump-sum payment, or fixed monthly payments for life, or term payments that last for a set time period (e.g. 5, 7, or 10 years).
You need not repay right away
Another is that you don’t have to make payments on this type of loan right away. Unlike other loans, there are no prepayment penalties. The homeowner or even their heirs, eventually repay the loan - and usually by selling the property.
No property risk
This is one of the most attractive features of a reverse mortgage as everything from the value to all lien holders is protected. There is no risk of losing your house by not paying the mortgage.
Avoid the hassles of refinancing and property maintenance
With refinancing, the homeowner will have to pay any closing costs which can also include appraisals, legal fees, and so much more. Additionally, with a refinance, it may even require you to make additional home improvements. This can be costly. However with a reverse mortgage, one does not have to worry about any of this because the home equity is paid out to you.
One of the biggest benefits of a reverse mortgage is that it will not be taxed at the time of repayment. This means overall that one can keep money in their pocket and not have to pay taxes on it.
Funds are available in an emergency
Another benefit of a reverse mortgage is that you can access your funds for any emergency. Unlike if you had a regular mortgage, with this loan you can do an advance on your home equity. This allows for a quick and easier cash flow.
To Get Going
Overall, people as they get older realize a significant fall in income especially as they retire. In this instance having monthly mortgage payments can be one of the major expenses. With a reverse mortgage, this reduced income stream can be supplemented and you still live a financially stable lifestyle. It is important however to sit with your financial advisor first. As you go through the process, your home will have to have a valuation report to ascertain its current equity.
Based on your current position in life, it is important to acknowledge this as another form of credit, and be mindful of your financial discipline.