What Is Reverse Mortgage? Here’s What You Need To Know
It is not an entirely new concept, but many people still have fears and misconceptions about reverse mortgages still. This time, we break down the basics of a reverse mortgage to help homeowners make smart choices about their property and finances.
In a nutshell, a reverse mortgage is a type of loan explicitly offered to homeowners aged 62 years or older, allowing them to convert a portion of their home equity into cash without requiring them to sell their home. Compared to a traditional housing loan which is a type of forward mortgage, a reverse mortgage does not require the borrower to make any loan payments unless he sells the house, permanently moves out of it, or passes away.
With a reverse mortgage, the lender is the one who makes payments to the borrower based on the equity of their home. The loan amount is based on the borrower’s age, the value of the house, and current interest rates. As the borrower receives the payments, the interest on the loan accrues, and the loan balance increases.
Benefits And Advantages Of A Reverse Mortgage
One of the key benefits of a reverse mortgage is that it enables homeowners to make full use of their property’s value without having to sell it or move out. This can be particularly helpful for older individuals with limited income or who want to age in place.
Since the property remains with the homeowner, the reverse mortgage can serve as supplemental income for those who need more financial support in their retirement years. They can use the extra cash to cover living expenses, medical bills, or unexpected expenses.
The homeowners will also have a sense of security and stability with a reverse mortgage because the loan will only be due once the borrower permanently moves out or dies. This means they won’t risk foreclosure and won’t have to worry about losing their home before they are ready.
Finally, a reverse mortgage offers flexibility since the borrower can choose how to receive the funds as a lump sum, through equal monthly or term payments, or via monthly or periodic payments with a line of credit. The borrower also decides what the money will be used for – whether to pay off debts, cover home repairs or renovations, fund travel, or other lifestyle expenses. The homeowners can fully enjoy access funds from their property value.
How To Apply For A Reverse Mortgage
As with any loan, certain conditions must be met by both the homeowners and the property being mortgaged to qualify for a reverse mortgage; and you can learn more about how a reverse mortgage works. On the side of the borrowers, aside from meeting the age requirement of 62 years old and above, they must also be clear of any federal debt, such as income taxes or student loans. Any outstanding loan balances must be fully paid out of their pocket or using the funds from the reverse mortgage.
In addition, the property being mortgaged must be the borrower’s principal residence, meaning they must live there for most of the year. The house must meet the required property standards, or repairs must be done accordingly to approve the loan. Any remaining mortgages against the property must be fully paid from the borrowers’ own money or through the funds acquired from the mortgage. Lastly, there must be enough funds left to the borrower to pay for recurring expenses related to the property, such as taxes, insurance, and maintenance and repair costs.
To start the application process, interested homeowners must first meet with a HUD-approved reverse mortgage counseling agency. This is part of the application requirements to ensure that they fully understand the financial implications of the loan before proceeding with the application. They can also take this time to discuss their eligibility and other loan alternatives.
The next step is to choose a lender, and they can compare rates and fees from different companies to find the deal most suitable for their lifestyle and preferences. After settling on a particular lender, they can file their application and provide the necessary documents, such as a copy of their mortgage statement, proof of income, and proof of homeowners’ insurance.
Once the application is filed, the lender will appraise the property to determine its value, which will be used to estimate the amount it can borrow. If the property qualifies for the mortgage, the lender will underwrite the loan, which includes verifying the borrower’s income and credit history. Finally, upon loan approval, the borrower will be asked to attend a closing where loan documents will be signed, and the loan amount will be released shortly afterward.
Read more – 7 Key Benefits of a Long-Term Mortgage
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