As an empty nester, it’s likely you’ve heard the term “reverse mortgage” pop up more frequently among your circle of acquaintances.
Although we at MidWestOne Bank do not offer reverse mortgages, it is important to understand this type of mortgage option, to see if it is a viable option for you.
If you’re 62 or older and looking for money to finance a home improvement, pay off your current mortgage, supplement your retirement income, or other expenses – it’s important that you fully understand how this financial tool works before you pursue it.
What is a reverse mortgage?
With a “normal” mortgage you make regular payments of principal and interest, to the lender. With a reverse mortgage, you can receive money from the loan or line of credit, and are not required to pay it back for as long as you live in your home, as your primary residence. In other words – it lets you convert a portion of the equity in your home into cash, for when you need it.
Unlike a traditional home equity loan or second mortgage, with a reverse mortgage you are not required to make regular monthly payments and won’t have to repay the loan until you no longer use the home as your principal residence or fail to meet the obligations of the mortgage.
The reverse mortgage is an FHA, federally insured loan program and is repaid when you pass away, sell your home, or when your home is no longer your primary residence. The proceeds of a reverse mortgage generally are tax-free, and many reverse mortgages have no income restrictions.
Who is eligible for a reverse mortgage?
To qualify for a reverse loan, you must:
- Be 62 years or older.
- Own your home, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan.
- Live in your home, as your primary residence.
Due to the complexity of these loans, FHA also requires you receive financial counseling prior to obtaining this type of loan.
How much money can you receive?
The amount that is accessible to you depends on a variety of factors, including:
- The age of the youngest borrower on title.
- The current interest rate.
- The appraised value of the property.
- The cost of the mortgage insurance.
Your lender will use a formula to calculate the exact amount based on these variables.
How do you receive the payments?
If you determine that a reverse mortgage is the right choice for you, you will be able to choose from a number of different payment options.
- Tenure – equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
- Term – equal monthly payments for a fixed period of months selected.
- Line of Credit – unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
- Modified Tenure – combination of line of credit and scheduled monthly payments for as long as you remain in the home.
- Modified Term – combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.
Benefits of a reverse mortgage
A reverse mortgage can be a powerful financial tool for retirees:
- Receive cash or pay off debts without having to make any payments on your loan.
- You will not need cash to cover closing costs. You can use the money you receive to pay the loan’s closing costs.
- It’s easy to qualify for a reverse mortgage because your credit score or income stream is not considered.
- Reverse mortgages allow you to stay in the property for as long as you continue to pay the property taxes and insurance and live in the property as your primary residence, even if the outstanding loan and interest grow to exceed the property’s value.
- Reverse mortgages can be used as an estate planning tool. For more information on this, consult your tax planner.
Disadvantages of a reverse mortgage
While reverse mortgages have benefits, they also have some disadvantages:
- When you take out a reverse mortgage you are losing equity in your home.
- The money you receive from the loan is not free money – it has to be repaid to the lender.
- Reverse mortgages can often be more expensive than “normal” home loans. That is because lenders may have to wait many years for repayment of any kind.
- It’s a complicated process that can be confusing and overwhelming. Be wary of people who do not have your best interest at heart.
As with any other financial product, it’s important you educate yourself about the advantages and disadvantages of the tool before you decide if it’s the right choice for you.