A Primer On Reverse Mortgages
Economists report that as housing prices have increased over the past several years
, the amount of money that households are saving through 401(k) plans and FDIC insured savings accounts has dropped. For many people approaching retirement age, that signifies they might be "equity rich" and "cash poor" at the same time. It is not uncommon these days to see people living in $1 million homes almost entirely reliant on social security to survive.
A 1994 Advisory Council on Social Security trends and issues came to the conclusion that reverse mortgages could give an extra source of income for seniors although at the time housing prices were not high enough to make this a significant source. Well, things have changed.
A reverse mortgage continues to be a loan with your house as the collateral, but it's entirely different from the type of mortgage you got when you purchased your first house. These are the main differences:
The Lender Pays You
That is right. You do not make a monthly payment with a reverse mortgage. The lender pays you, and the loan can be established so that you can get paid in a lump sum, you can get paid regular monthly amount, or you can get paid at the times and in the amounts you request.
The terms of the loan figure out what every one of these amounts would be. The primary determining factors are your age, the value of your home, and the prevailing interest rates at the time.
You Continue to Live in Your home
Staying in your home is really the whole purpose of reverse mortgages when you get down to it. The twist is that instead of paying somebody else to live there, you get paid while you continue to live there.
You're actually required by the terms of the loan to still reside in the home as your principal residence. You can spend any amount of time visiting your kids and grandchildren, you can travel for pleasure, and you can continue to spend summers at the lake so long as the house continues to be your principal residence.
You Retain Ownership of Your house
A reverse mortgage isn't a sale. You keep all the rights of ownership that you had before the reverse mortgage loan. You don't require the lender's permission to paint the home a different color or to remodel. You can put your home on the market and sell it to the highest bidder. You can will it to your children.
If there's a change in ownership, for example by sale or via the death of the last surviving owner, the reverse mortgage will have to be paid off at that time. The lender would be eligible to receive from the proceeds of the sale only the amount you really received from the lender plus all accrued and unpaid interest to date. Any amount remaining after paying off the reverse mortgage lender would go to you, to your surviving spouse, or to your estate.
The Principal Amount of the Loan Increases With Every Payment
Another manner of saying this is that you simply control the amount that should ultimately be paid back by handling the amount of cash you actually get from the lender. A reverse mortgage continues to be a loan, and the money along with interest has to be paid back at some point, usually from the sale of the home after you and your spouse will no longer reside there.
Since the principal amount of a reverse mortgage cannot be established until after you no longer live at the property, neither can the maturity date of the loan. This can be a challenging concept to wrap your mind around because it's very different from conventional mortgages.
You can Never Owe A lot more than the Value of Your house
This is true for the 2 reverse mortgage products sponsored by the Federal government (HECM and Home Keepers) although it might not be correct for privately created reverse mortgage programs.
The benefit of the Federal programs is that you, your surviving spouse, or your estate, can never owe a lot more than the loan balance or the value of your home, no matter which is less. Your reverse mortgage lender can't require repayment from you, your surviving spouse, or your heirs, or from any asset other than your house.
Reverse Mortgage Pros And Consby: Ryan Walker.
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