What is a Reverse Mortgage & What Can it Do for You?

What is a Reverse Mortgage & What Can it Do for You?

What is a reverse mortgage? In a nutshell, a reverse mortgage is basically the opposite of a traditional home loan.

As you pay off a regular mortgage the smaller the loan amount becomes. With a reverse mortgage, the longer you have it, the larger it gets.

You may be thinking, home mortgages don’t work that way. And normally they don’t.

Reverse mortgages are fairly complex financial products that allow the home owner to borrow money using the equity in your home as security.

The home owners best served by this financial product are those over 60 years of age. A reverse mortgage can be one of the best ways to fund your retirement.

You be thinking, Really? So how does that work? Well, let me tell you.

reverse mortgage, private money lender for property

 

The structure of a reverse mortgage can be underwritten to be paid out as either:

  •  a lump sum
  •  a regular stream of income
  •  a line of credit
  •  or a combination of these options

Interest is charged like any other loan, except you don’t have to make repayments while you live in your home.

The interest compounds over time and is added to your loan balance You don’t have to make repayments while you live in your home.

It all starts with an evaluation on your property to determine how much it’s currently worth. This will be the gage as to the amount you can borrow against it. Additionally, the age of the younger spouse is taken into consideration.

You remain the owner of your home and can stay in it for as long as you want. However, you must repay the loan in full (all interest and fees included), when you either sell the home, die or what happens in many cases, move into an eldercare facility.

You may be thinking, who is best suited for this type of financial product? It’s simple. The best candidates are people who either have retired or you are soon to be retired.

Here’s an ideal scenario:

A person, 65 years old, retires with a lot of asset-based wealth, mostly in their home, but almost no cash available. Or a senior citizen who’s looking for cash to supplement their pension or part time income.

People like this will have a difficult time actually funding their lives from that point on.

A reverse mortgage can be used to convert the current value of your home into available cash

It’s best if the senior person owns their property free and clear although it’s not usually a problem if there’s a small balance remaining on the original mortgage.

You may be thinking, how much will it cost? Good question.

To set up a reverse mortgage is usually in the neighborhood of $1500 to $2000. After that, the monthly fees may be as high as $20 monthly or nothing at all. This depends on many factors mostly on the lending institution your set the reverse mortgage up with.

Keep in mind, that the interest rates will probably be 1% or 2% higher than a regular mortgage because no monthly payments are required. Also, in some cases, the receipt of a reverse mortgage may impact the homeowner eligibility for a pension.

However, like any other banking product, it’s best to obtain financial, as well as, legal advice before you move forward with a reverse mortgage. In fact, many lenders will insist on it.

Let’s break down the Pros and Cons of obtaining a reverse mortgage:

Pros

  • The debt owed to the bank is normally capped at the market value of your home
  • It helps mortgage-free and cash-poor homeowners fund their retirement
  • There are options for payouts (eg. regular payments, line of credit or lump sum)
  • It could allow homeowners to stay in their homes whereas they may have had to sell otherwise
  • In the end, you can always sell your home and pay off the debt

Cons

  • There are higher interest rates than on a regular mortgage
  • The interest starts accumulating from day one
  • If you’re the sole owner, your spouse or other occupants may have to vacate when you die
  • The younger you are and the more you borrow against your home now, the less equity you’ll have in your home in the future

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