If you have equity in your home and need cash now, a reverse mortgage may be your best bet. Available to those who own more than 50 percent of their home and are aged 62 or older, a reverse mortgage is an extraordinarily useful tool.
But what exactly is a reverse mortgage? Here’s what you need to know.
What Is a Reverse Mortgage?
A reverse mortgage is a method by which you can tap into the equity of your home. With a reverse mortgage, you get an amount — either a lump sum or monthly — loaned to you, to be used as you wish. The loan is not recalled until you sell the home or pass on. Reverse mortgages are popular with the elderly, as they don’t require that you move out of the property. Rather, you’re able to use the equity of your home for your living expenses (or major costs, such as renovations), without having to pay the loan back immediately (as with a home equity loan). Unlike income, a reverse mortgage also doesn’t require any income taxes.
Reverse mortgages are only accessible after a certain age and they are generally used by those who either own their house outright (without a mortgage) or own a significant amount of equity in their home.
What Do You Need to Get a Reverse Mortgage?
To get a reverse mortgage, you usually need to have 50 percent or more equity in your home. As an example, if you own a $400,000 home and have $200,000 left to pay on your mortgage, you may be able to get the remaining $200,000 in a reverse mortgage. If you have a $400,000 home and have $50,000 left to pay on your mortgage, you may be able to access up to $350,000. And if you have a $400,000 home and $350,000 left in your mortgage, you may not have enough equity.
In addition to this, you shouldn’t have any other liens on the home, as this could be another, separate claim to the property. A reverse mortgage is open to those who are 62 and older. This is part of what makes a reverse mortgage beneficial, as it doesn’t have to be paid off until the property is sold, the borrower moves, or the borrower passes on. A reverse mortgage further doesn’t rely upon credit score, because it’s backed with the equity of the home.
What Are the Benefits of a Reverse Mortgage?
A reverse mortgage makes it possible for a borrower to utilize the value of their home while they still live in it. Unlike an equity loan or a personal loan, nothing has to be paid back until the individual moves or passes on. Because of this, many use a reverse mortgage as a type of untaxed income to improve their cash flow.
The alternative for many is to sell their home but selling a home can lead to other financial difficulties. After selling a home, a borrower may find that they then need to find another place to live, which could be an expensive rent payment. If they have a paid-off home now, it usually doesn’t make sense to sell it just to rent elsewhere.
That doesn’t mean that a reverse mortgage is always the best solution, but it’s always a financial tool that should be explored before someone decides to take on another type of loan, additional credit debt, or to sell their property entirely. In many situations, a reverse mortgage is going to be the solution that delivers the most flexibility and freedom.
Who Should Get a Reverse Mortgage?
A reverse mortgage is best used by those who:
- Have equity in their property. This means that the property is valued at more than you owe the bank.
- Need cash now. A reverse mortgage can deliver cash either immediately or in the form of monthly payments.
- Are old enough. Because of the way a reverse mortgage works, it’s only open to those 62 and above.
- Don’t want to move. Reverse mortgages remove the worry of having to transition to a different living situation.
- Don’t want to worry about credit. As an equity loan, having bad credit doesn’t disqualify you.
This could include:
- Retirees who want to fund their retirement lifestyle without having to borrow money and have to pay it immediately back.
- Grandparents who want to pay for a grandchild’s college tuition or other major expenses.
- Patients who need medical treatment and don’t want to remain in debt.
- Parents who want to help their child with a wedding or buying a home of their own.
- Investors who want to invest in a business or a specific asset class rather than keeping their investment in real property.
A reverse mortgage gives you cash and it’s up to you what you do with that cash. It’s a very flexible and accessible financial product, assuming you meet the appropriate criteria.
Do You Need to Move Out of Your Home Immediately?
No.
One of the incredible benefits of a reverse mortgage is that you don’t need to move out of your home at all. Rather, you can live there until you pass. When you pass on, the home will revert to the lender to pay off the remaining debts. Once the home is sold, the remaining funds will still go to your beneficiaries. And your beneficiaries will have a chance to pay off the loan with your estate or their own funds if they want to keep the property. They can even take out a separate loan.
What if you want to move earlier? You can still move or sell your home, you’ll just need to pay off the balance of the loan first.
What If You Still Owe Money on Your Home?
Not many people own their house outright. There are quite a few people who do still have a mortgage on their property. You don’t need to own all of your homes but there are some considerations. First, you need to be able to make the lender the first lien holder so you’ll need to talk to your bank. Second, you do need to own at least half of your home. Third, the value of your equity is going to control how much money you can borrow against your home.
But none of that should stop you from inquiring about a reverse mortgage because it’s very situational. Talk to the mortgage company about your current financial situation and your home and they’ll be able to tell you what the likely right action is for you.
What Condition Does Your Home Need to Be?
Your home should be up to code and pass a brief inspection. But it doesn’t need any updates or modern renovations. You should be able to maintain the current condition of your home throughout the loan, so the property should be given in good condition to the lender at the end of the loan, whenever it is entering into repayment. But the reverse mortgage company will inspect the property and tell you whether it’s in good enough condition or needs repairs. It’s best to ask first so you understand exactly what the criteria might be.
There should be no major structural issues with the home. Usually, that means roof issues and foundation issues. These can cost tens of thousands of dollars to fix. Similarly, issues with termites, pests, or mold will also count against you because they can damage the structure of a property.
Do You Need to Maintain Your Property?
Some borrowers may live in their property for literally decades after getting their reverse mortgage loan. Because of this, the property must be maintained. The reverse mortgage company will have a list of required maintenance tasks, such as getting the roof inspected periodically for damage or replacement. But the company will not ask you for any maintenance that you shouldn’t already be doing. If you’re taking good care of the home, you aren’t likely to experience any changes. The goal for the lender is that your property has to be in sellable condition once you need to repay the loan. If the property is in disrepair, it may not be able to recover the amount you borrowed.
So, yes, there are maintenance tasks associated with a reverse mortgage. But many are fairly trivial and are something most homeowners are likely to already be doing.
Do You Need an Appraisal for a Reverse Mortgage?
An appraisal is useful for a reverse mortgage because it will tell you about how much you can expect as well as tell the company how much your property will likely be on the market. But most reverse mortgage companies will send their own appraiser and inspector to look at your home to determine its value. Value can be decided on many factors and can fluctuate. It depends not only on the property itself but also on the local market. It also depends not only on the local market but also on the national market. If the market is down, it could be appraised at lower than normal.
If you’re wondering how much you can get for your property, your best choice is usually to call the reverse mortgage company. You have no obligation to take the loan, you can get a quote from them before you decide. You may also want to talk to a real estate agent if you want to know your property’s value
Can You Cancel a Reverse Mortgage?
Like most large purchases (buying a home as well), there’s a cool-down period for a reverse mortgage. Even if you’ve signed all the paperwork, you’re allowed to cancel a reverse mortgage as long as it’s only been a couple of days.
If the bank has already disbursed funds, they have some time to make sure they recover everything. You might cancel your mortgage if you decide you don’t really need the cash, if you find better rates somewhere else, or if you find a different financial tool that works for you. Either way, canceling would just mean connecting with the reverse mortgage company about the loan. They will tell you how to cancel it and work with you to make sure you know what to do.
How Do You Receive Your Funds With a Reverse Mortgage?
You have two main ways of accepting funds from a reverse mortgage. First, you can get it in a lump sum. This can be good if you have a major expense or want to invest the money. Second, you can get the money as a monthly stipend. This option is usually used by retirees who want to secure additional income. Either way, it’s your choice and the loan still won’t enter into repayment until you are no longer in the home.
Everyone’s financial situation is different. But there are many ways a reverse mortgage may be able to help. Contact us today to find out more about how a reverse mortgage can help you.