Tag: Reverse Mortgage Information

How A Reverse Mortgage Works

Ever wonder how a reverse mortgage works? For folks that have lived in their home for a long time, they may very well be sitting on a substantial amount of equity. Home prices have increased greatly over the last thirty years. This has left a great many homeowners with valuable equity in their homes and many different options to access that equity, with home equity loans and mortgage refinances being the most common.

For older Americans, there is another, less common option that is growing in popularity as home prices have increased and baby boomers have moved closer to retirement age: the reverse mortgage. But do you know what it is, and do you know how a reverse mortgage works?

What exactly is a reverse mortgage, and how does a reverse mortgage work?

A reverse mortgage is a loan product that allows homeowners 62 years of age and older to use their equity to generate tax-free income, without having to sell their home or take on a new mortgage payment. In fact the reverse mortgage is exactly what the title states, the reverse of a standard mortgage.

With a standard mortgage, the borrower (or homeowner) makes monthly payments to the lender (or bank or mortgage company), in order to pay back the loan that the lender originally lent them for the purchase or refinance of the house. This payment includes interest that the lender charges the borrower for the loan. In a reverse mortgage, the situation is reversed; the lender makes monthly payments to the borrower. However, in both a standard and reverse mortgage, the lender secures their loan amount by using the house as collateral.

There are a few factors that determine how much money a borrower will receive from a reverse mortgage, such as the value of the home, the borrower’s (and co-borrower’s) age, current interest rates and any lending limits that may be standard for your geographic area. As a rule of thumb, the older the borrower and the more valuable the home, the larger the available loan amount.

Homeowners can choose how they want to receive their payments, either as a lump sum, monthly payments or as a line of credit. The line of credit is the most popular option, with nearly 60% of reverse mortgage borrowers choosing this option to draw income or a lump sum off the line at the time of their choosing.

The proceeds from a reverse mortgage can be used for anything, completely at the discretion of the borrower, though most borrowers use the funds for home repairs or modifications, health care expenses, to settle other debts, or for a long-planned vacation.Reverse mortgages are available for nearly all property types, with the exception of co-ops.

If you are in retirement, or nearing retirement, and think this may be the product for you, here is some more detail about exactly how a reverse mortgage works.

For reverse mortgage borrowers with an existing mortgage, that mortgage will need to be paid off completely, so that the new reverse mortgage will be the only lien on the house. If the proceeds from the reverse mortgage are not ample to pay off the existing mortgage, the borrower will need to access savings or other sources to pay off the rest of the existing mortgage amount. In this scenario, the borrower won’t have access to any additional funds from the reverse mortgage; however, they will no longer have a mortgage payment!

The more common scenario is one in which there is a small or no mortgage on the home, and the borrower is able to access nearly the full amount of the reverse mortgage to use at their discretion. No monthly payments are due on the loan and the loan is repaid when the owner moves or sells the home, passes away, or ownership otherwise changes hands. If the home is sold and the proceeds of the sale exceed the mortgage amount, the balance belongs to the borrower or their heirs.

In most cases, there is nothing out of pocket, however, there are substantial costs that are built in to a reverse mortgage. Therefore. one very important facet of the reverse mortgage process is the consumer counseling that is required for borrowers contemplating this type of loan.

Your lender can help you find counseling agencies, and most programs are approved and monitored by HUD. The counseling is required to make sure that the terms and risks of the program are clear to you. Counselors are obligated by law to review with you all of the implications of the new mortgage, and what your potential options are.

If you are interested in a personalized analysis of what the costs and terms of a reverse mortgage would be for you or a family member, click here for further information. Or use the form on the right side of this page to drop me an email requesting your personalized analysis.

Overall, for older Americans contemplating a stress-free retirement, a reverse mortgage may be the right solution! Just make sure that you know your options and goals… and how a reverse mortgage works.

Top 5 Reasons People Get Reverse Mortgages

A thorough cost vs. benefit analysis has to be done in order to determine if a reverse mortgage is the right solution for yourself or a loved one

Let me say at the outset, that reverse mortgages are not for everyone, and although we offer them, a thorough cost vs. benefit analysis has to be done in order to determine if a reverse mortgage is the right solution for yourself or a loved one.

If you’re eligible (a homeowner 62 years of age or older with equity in your principal residence), this may be a quick decision or one that requires a bit more consideration. As with any decision, it’s always helpful to get the perspectives and experiences of others who have faced similar situations and asked themselves the same questions. So for those other folks who have decided to get a reverse mortgage, what were their reasons?

We’ve asked some of our readers and site visitors and below are the top 5 reasons people get reverse mortgages:

1.Retire in style – Most homeowners getting close to retirement age have spent the last thirty years or more making mortgage payments; depending on where you live, this monthly obligation could be anywhere from a few hundred dollars a month to a few thousand dollars a month and beyond. Every month, that one big check goes out the door to the bank and leaves you with that much less cash to save, invest or spend on the items you need and want. How great is it to finally turn the tables on Main Street Bank, where they now send you a check each month? Most retirees have steady monthly costs, such as housing, medical, insurance and other necessary expenses. For non-working retirees, those expenses are managed with a fixed income from retirement accounts, pension plans, social security or other plans. A reverse mortgage allows a retiree to increase their fixed income and provide cash to do some things that they might otherwise not be able to afford to do. Typically, the personal quality of life is the number one reason people get reverse mortgages.

2.Pay hospital or medical bills – For many older Americans and retiree’s, medical issues are an increasing reality in their daily lives. With the ever rising cost of healthcare, this can put tremendous demands on a fixed income. Ongoing medical treatments, prescription drug regimens, or a large one-time (possibly unforeseen) medical bill are all top reasons that people get reverse mortgages.

3.Improve or modify a home – While this may not be an expansion of the home, the early part of retirement is a great time to re-purpose your house to accommodate the way you will be living for the next ten, twenty, thirty years and on. Maybe it’s time to expand the kitchen, widen the hallways or remove some steps, or exchange the old pool in the backyard for a beautifully landscaped garden. As we get older, a top reason people get reverse mortgages is to outfit their home for their new lifestyle.

4.Dream vacation anyone? – What better time to just get away than when your working days are behind you and the weather turns a bit gloomy? Proceeds from a reverse mortgage have allowed many homeowners to take that vacation they’ve always dreamed about, but never had the time or resources to take.

5.Pay off high interest rate or problematic debts – With the large amount of debt that the American consumer accumulates over a lifetime, it should be no surprise that this is a top reason people get reverse mortgages. Whether its high interest rate credit cards, a relative’s student loan debt, or even a potential foreclosure that must be dealt with, reverse mortgages can be a very effective way to get a large sum of cash to manage other debts.

We offer reverse mortgages in either a lump sum or line of credit, and unlike most lenders, we charge no origination or broker fees, saving you thousands of dollars. For a free personalized illustration, contact me anytime.

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