What Should Homeowners Know About Reversed Mortgages?
Most home buyers applying for a loan know what a mortgage is, but a reverse mortgage may seem far less familiar. Maybe you’ve heard this mortgage term bandied about and maybe have even seen the late-night TV ads promoting them. But people are often confused or all-out clueless on the details of this type of loan, so allow us to explain.
So, What is a reverse mortgage?
True to its name, this type of mortgage is the
opposite of a traditional loan, where you borrow a couple of hundred thousand
dollars for a mortgage from a lender and then slowly pay it back month by
month—plus interest. In a reverse mortgage loan, your lender pays you, slowly turning the home equity
you’ve earned back into cold, hard cash.
However, just because you qualify for this type of mortgage doesn’t mean this loan option is a good idea for you. Read on to make sure you understand the risks and benefits, and how this will affect your home equity.
Who can get a Reverse Mortgage, and What are the Benefits?
This type of mortgage is available to homeowners 62
and older and can be useful for seniors searching for a loan who may not have
much in terms of income or assets. A reverse mortgage taps into their home
equity and increases the amount of money they have coming in to cover various
living expenses.
The mortgage loan must be repaid when the last borrower, co-borrower, or eligible spouse sells the home, moves, or dies.
How much money can I get for a reverse mortgage?
Most people are wondering, what is this type of loan
really going to do for me? The amount you can qualify for is known as the
initial principal limit (IPL). The IPL of a mortgage is determined by combining
a home’s value, the homeowner’s age, the type of loan, and the interest rate.
It’s rarely more than about 60% of the home’s value—and it tops out at
$625,500.
There are a variety of ways you can receive money from this type of mortgage. The standard loan disbursement options include, but are not limited to the following:
- Tenure: The borrower receives monthly mortgage payments guaranteed to last until she dies or moves.
- A line of credit: The loan amount can be accessed whenever the mortgage borrower needs money. And the sum grows in value, not due to interest but the assumption that the home appreciates with time.
When Does the Mortgage Have to be Paid Back?
A reverse mortgage can become due if the borrower fails to pay homeowners insurance or real estate taxes on the loan. But what’s more likely is that the borrower moves out or passes away, and that’s when a mortgage’s outstanding balance needs to be paid off.
What are the Risks of Reverse
Mortgages?
In spite of
these advantages, reverse mortgages have a bit of a sketchy reputation, largely
due to misleading claims made by unscrupulous lenders. In the past, if only one
member of a married couple put his or her name on the mortgage—and that spouse
died—the surviving spouse could face foreclosure if they default on the loan.
In recent years, regulations and safety measures surrounding reverse mortgages have improved, these loans still have some sizable drawbacks. For one, they tend to have worse terms than other means of tapping your property’s value, like home equity lines of credit. Plus, the fees associated with this type of mortgage can rip through a homeowner’s equity quickly.