Copyright (c) 2014 Michael Emond
Understanding Reverse Mortgages
Can’t remember how many times I’ve been asked “What is a reverse mortgage”?
Reverse mortgages are a great way to get a loan using your primary asset. The flexibility, of course, comes at a price. A reverse mortgage is a loan using your property and is referred to as a “rising debt, falling equity” deal.
To compare reverse mortgage to a traditional one, the type of mortgage commonly used when buying a house is classified as a “forward mortgage”. To qualify for forward mortgage, you must have a steady source of income. Because the mortgage is secured by the asset, if you default on the payments, your can lose your home.
Your equity is the difference between the balance mortgage amount and how much you’ve paid. You own the house when you make your final mortgage payment.
The reverse mortgage process doesn’t require that the applicant have great credit, or even to have a steady source of income. The major stipulation is that the house is owned by the applicant and a minimum age is required as well, the older the applicant, the higher the loan amount.
Another less known requirement is that the reverse mortgage must be the sole debt against your house.
In a reverse mortgage your debt increases along with your equity. Instead of making any monthly payments, the amount loaned has interest added to it – which swallows up your equity bit by bit. If the loan is over a long period of time, when the mortgage comes due, there may be a large amount owed.
On the other hand, if it was to increase, this could allow for an equity gain, but this isn’t typical of the marketplace.
There are a few options in withdrawing the money form the loan. It can be a single lump sum, regular monthly advances, or a credit account. There are conditions in this kind of mortgage that would warrant the immediate repayment of the loan; the mortgage will be due when the borrower dies, sells the house, or moves out.
Failure to pay your property taxes or insurance on the home will undoubtedly lead to a default as well. The lender can pay for these obligations to reduce your advances in order to cover the expenses. Be sure you read the loan documents carefully and in detail and also make a point to understand all the conditions that can cause your loan to become due.
Reverse Mortgages Basics
Reverse mortgages are loans against your home that require no repayment for as long as you live there. As opposed to traditional mortgage loans, reverse mortgages does not require proof of income and are based solely on the equity of your home. There are no monthly payments to make as the mortgage will only due when the borrower moved out from the property or in the event of death.
US seniors over the age of sixty two are eligible for reverse mortgages provided they have their own single family dwelling. No health requirement is needed, and you get to keep your Social Security and Medicare benefits if your reverse mortgage is approved. Some benefits, however, such as Supplemental Security Income (SSI) and Medicaid can be reduced under specific circumstances.
Tax liability for monies received through a reverse mortgage are a non-issue, as loan advancements are not taxed, although interest on the loan is consequently not tax deductible.
There are no income requirements to be eligible for a reverse mortgage loan. You may be eligible for a reverse mortgage even if you still owe money on an existing mortgage. The reverse mortgage loan must be substantial enough to pay off the existing loan completely, however.
The benefits of a reverse mortgage include increased cash flow almost immediately while many other options are on a fixed monthly income. This way it will fully utilize the equity value in your home. Several options exist to help seniors to plan for their advances so that they can fit into their budgetary concerns and cash flow needs.
Most may feel that borrowing against their home is a risky action to take, especially when they are in their twilight years.
Since they are not borrowing against future income, reverse mortgage does indeed hold minimal risk and many who choose this type of mortgage are able to enjoy what they have worked all their lives for in their post retirement years.
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