If you’re unfamiliar with how a reverse mortgage works, or unaware of the benefits that they can offer homeowners aged 62 and older, you’d be wise to begin to learn a bit about them now. You will likely have a loved one who may need a reverse mortgage in the future, to say nothing of the fact, that at some point, you may need a reverse mortgage yourself. So it’s not too soon to begin understanding just how these loans work.
Reverse mortgages, which are designed for homeowners 62 and older, are one of the most under used mortgage products available. However, for those looking to free up extra cash each month a reverse mortgage may be a great option. Here’s how they work:
A reverse mortgage is a loan available to homeowners 62 and over only. It uses a portion of the home’s equity as collateral. Unlike an equity line of credit, however, a reverse mortgage loan does not have to be repaid until the last surviving homeowner who is 62 or older moves out of the home or passes away. Furthermore, instead of making monthly payments on an equity line of credit to the lender, with a reverse mortgage, you receive money from the lender.
To illustrate, consider this example. You own your home which is worth $700K in today’s market. You have a mortgage balance of $100K. A reverse mortgage will allow you access to a portion of the $600K (less fees and costs of the loan) in equity that you have in your home. That money can be distributed to you through monthly payments or as a lump sum. After the homeowner moves out of the home, or passes away, the loan is paid back through the proceeds from the sale of the home.
I’m certainly simplifying the process, and there are minimal requirements that have to be met to be eligible for a reverse mortgage. These include the age of the homeowner, and the amount of equity in the property. However, there are typically minimal to no credit requirements, nor income requirements. Moreover, you will not be taxed on the money that you receive from your reverse mortgage, and upon repayment of the loan, the interest may be tax-deductible.
Yet, it is important to note that reverse mortgages aren’t free money, and there are some things you must fully understand before obtaining this type of loan. The money does have to be paid back, with corresponding interest rates. In some cases the fees for obtaining a reverse mortgage will be higher than other types of loans. Similarly, the interest rate may be higher than the interest rate on an equity line of credit. Additionally, the homeowner will always be responsible for paying all property taxes, maintaining homeowners insurance, and of course, maintaining the home.
There are pros and cons to every type of mortgage loan, and a reverse mortgage is no different. Before you or a loved one deciding to apply for this type of loan, I encourage you to meet with your financial planner to determine whether or not accessing the equity you have in your home, in order to free up extra money right now, is in your best interest. Make sure you also meet with a trusted local mortgage professional, so that you clearly understand the costs and fees associated with a reverse mortgage. There are many vital considerations to be made, and I urge all homeowners, and their loved ones to conduct thorough diligence before deciding to obtain a reverse mortgage loan.
Fred Arnold is a Certified Mortgage Consultant, proud board member of the SCV Chamber of Commerce and mortgage professional at American Family Funding in Southern California. Fred hosts the radio show The Santa Clarita Business Hour on AM 1220 KHTS, as well as the televised program Out of The Rough on SCVTV.com, channel 20.
He can be reached at Fred@fredarnold.com or via phone at 661 284-1150