In simple terms, reverse mortgages are considered loans. Any eligible borrower can borrow the value of their home and receive lump sums. Read more about them in this link here.
The borrowers should be 62 years old or older, and they should have considerable ownership or equity in their homes. Some may prefer a line of credit or a fixed monthly payment depending on their needs. Unlike the forward mortgages, there’s no requirement for homeowners to make payments.
Instead, what happens is that the entirety of the principal amount and interest becomes payable and due in the event that the borrower will move away or dies. Others can pay the amount when they sell the home.
Specific federal regulations may require the lenders to have a more solid structure to the transactions to ensure that the amount is not going to exceed the property’s actual value. There’s also a provision in the law that the borrower will not be responsible for the excess, especially if the borrowed amount is more than the home’s actual value. The fees and interests are added to the balance every month, and this is going to grow.
In this arrangement, the homeowner will pay the required property taxes, insurance and keep the house in good condition. They are using this house as their principal residence, and they should not move out.
The amount owed can go up over time. This is because of the added costs of fees and interest that accumulate each month. As the balance is increasing, the equity will also decrease. Know that this loan is not free money, and the heirs will eventually have to pay back everything when they sell the house.
How Does the Process Work?
Are you wondering if this is a good idea in the first place? To answer this, you need first to know and get a grasp on how everything works. You also need to know the payments.
In reverse mortgages, you can access the funds without the bill following afterwards. With the traditional mortgage, you may borrow $100,000 with a fixed rate of 3.4 interest in the space of 30 years. The principal and the interest will equal about $443.48 in just a few months. If you borrow this same $100,000 through a reverse mortgage, the interest and monthly amortization are $0.
You may think that this is too good to be true. However, know that you’ll still owe money.
In the example of the traditional way of doing things, the borrower’s amortization is $443 every month. Out of that amount, $160 goes to the principal itself, and the rest is interest. This is what many lenders are charging when they loan you the money. You can read more on sites like https://www.geoffleemortgage.com/mortgage-services/reverse-mortgages/ to know more about the services. This is a plan that can continue until the amount is fully paid and the term is up.
However, when it comes to a reverse mortgage, the processes are often flipped. Instead of you paying the $443, you pay nothing. This does not mean that everything is free. In the second month, the initial loan of $100,00 is going to grow. Since the amount is higher, the interest will grow with it until the time comes that you repay everything. This repayment usually happens when you decide to move out of the home, and you have a year to pay everything back or in the event of death.
Pros to Consider in a Reverse Mortgage
You may be in your senior years, and you’re weighing your options on whether a reverse mortgage is right for you. Some of the advantages to consider are the following:
Better Management of Overall Expenses
Many seniors need the money for medical care, and they are experiencing a significant decrease in income upon retirement. One of their expenses is their monthly mortgage. In a reverse scenario, they can continue to pay their bills and supplement their daily expenses and needs through their equity.
They Don’t Have to Move To A New House
Instead of going into a smaller apartment or more affordable home, you can age in place with a reverse mortgage. You can even stay with the community where you have lived for so long and be near friends and families. Another thing is that while there are costs involved, it’s always cheaper to do a reverse mortgage than to find a new property in a new place.
Income is Not Taxed
The IRS does not tax the income that you may receive every month from the transaction. This is because they are classified as loan proceeds. In the same way, the reverse mortgage interest will not be deductible until the actual payment of the total amount. There are tax rules that vary, and they can be complicated, so make sure that you get advice from the right professionals when you want this to go through. Know more info about loan proceeds in this link here.
Borrowers are Protected when the Balance Exceeds the Home Value
Because the mortgage, in general, is growing in size, it can exceed the fair market value of the property. However, the repayment on the total amount of debt should never exceed the said value because this is non-recourse financing. The lender will not have any claim against the other heirs or assets in these situations.
Heirs Will Have Options
Borrowers can repay their reverse mortgage in the soonest possible time they want. In the situation when they die, the heirs can sell the home and repay the debt. Another option is to refinance the reverse mortgage value if the amount is sufficient to the house’s value. If the debts exceed the value, there’s always an option to settle by giving the mother title to the financiers. The lenders will file a claim to the unpaid balance with the insurance company, which is almost possible with the FHA.
Know that there are other cons like foreclosures or violating other program requirements in Medicaid or SSI programs. These are all complex matters, and you need a qualified lawyer to assess your situation. However, if you find that this will benefit you over the long run, then go for it.