Reverse Mortgages: A Basic Explanation
Over the years, youve put thousands of dollars into your home
, paying off your mortgage and adding improvements that likely have resulted in a significant increase in your homes value. Now youve retired, and youd like to experience some of the hard-earned fruits of your labor. If youre 62 or older, a reverse mortgage could be a good option for you to unlock the money youve paid into your home.
But just what is a reverse mortgage and how do you know if you qualify for one?
In a traditional first or second mortgage, the lender places a value on your home and then loans you an amount of money that is a percentage of that value usually 80 percent, but sometimes more. A first mortgage is usually used to purchase the home, while a second mortgage (or home equity loan or line of credit) is used to draw existing equity from the home you own to pay for other items or repay debts. In some cases where a home is paid in full, a first mortgage may also be taken out to pay for goods or to repay other debt. With first and subsequent mortgages, the lender will determine the interest rate and the payback term, and the borrower will pay a fixed amount every month for the life of the loan until the home is paid off or sold, at which time the borrower must repay the entire amount. Once the loan is repaid, the lender releases its obligation and the home is owned entirely by the buyer.
A reverse mortgage is similar to a home equity loan in that it allows you, as the homeowner, to draw from your homes equity to pay for bills and other expenses. But unlike a traditional mortgage that requires regular monthly payments, a reverse mortgage does not require that you repay the loan for as long as you stay in your home. Instead, the entire loan balance and accrued interest become due when you pass away, sell your home, or leave your home permanently for instance, moving into a loved ones home, nursing home or extended-care facility. At that point, the loan becomes immediately due, and must be repaid by an heir or other loved one, or the home can be sold by the bank.
A reverse mortgage is also similar to a traditional mortgage in that you, as the homeowner, are responsible for paying for home insurance, maintenance and repairs, as well as property taxes.
In most cases, any fees associated with the reverse mortgage can be rolled into the loan itself, which means you can use the money you receive from the loan to pay for the various fees associated with it.
The amount of money you can obtain through a reverse mortgage depends largely on the mortgage plan you select, as well as the frequency and type of cash advance you select. Some individuals may choose to receive their equity in one lump sum, whereas others may prefer to receive smaller payments over time to address ongoing expenses. Lump-sum payment arrangements are usually approved for a smaller loan amount than those that are paid out in installments, and may also incur larger fees or higher interest rates. In addition, the amount of money you can withdraw will depend on your age (with more money generally available to older homeowners) and the value of your home (with more valuable homes qualifying for larger amounts of cash).
While a homeowner may have more than one traditional mortgage on a property, generally any existing first or primary mortgage must be paid off before you can receive cash from a reverse mortgage. In most cases, you will be able to use the proceeds of a reverse mortgage to repay any existing traditional mortgage.
Just as with a traditional mortgage, its essential you read and re-read the loan documents associated with your reverse mortgage. Be sure to resolve any issues that seem unclear to you prior to signing the reverse mortgage. Like a traditional mortgage agreement, a reverse mortgage agreement is a legally binding contract, and failure to meet the terms in the contract can result in prosecution.
After closing on your reverse mortgage, you will have three business days (not including Sundays or legal holidays) to change your mind and cancel the loan. You must cancel in writing not by telephone or verbally in person. And the notice of cancellation must be received before midnight of the third business day after signing.
In the United States, reverse mortgages are overseen by the U.S. Department of Housing and Urban Development (HUD), which maintains a list of counselors to help you determine if a reverse mortgage is right for you. Used responsibly, a reverse mortgage can be a great option for you to gain access to your homes equity, to loosen your budget or to treat yourself to some of the finer things life has to offer.
by: mor123
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