As homeowners age and retire, income often becomes unsustainable, and the largest asset they have is the equity that they have accrued on their home over the length of their mortgage. However, with a reverse mortgage, it is possible to receive money from a bank in exchange for a portion of the equity on a house. This process can relieve financial stresses for elderly homeowners, but it does not come without its risks.
So, how does a reverse mortgage work? Aptly, it works in the opposite way as a traditional home mortgage. While a traditional mortgage finds the homeowner paying their balance monthly to the bank, a reverse mortgage works by allowing the homeowner to leverage the equity of the house that they own to receive money from the bank. However, there are some eligibility restrictions regarding age and financial stability. To be eligible for a reverse mortgage:
- The youngest homeowner must be at least 62 years of age,
- The homeowner must be financially able to pay all taxes and fees for the property,
- The home must be the primary place of residency for the borrower, and
- The homeowner must have fully paid off or have a low remaining balance on their mortgage.
Advantages
- With a reverse mortgage, a homeowner receives money and is not required to pay it back until that person either dies or permanently moves out of the home. Because of this, reverse mortgages work best for people who are planning to stay in their home for many years after receiving the initial loan.
- It is especially advantageous to people who can afford their property taxes and use the money as extra disposable income or to pay off other remaining debts, including the balance of an existing mortgage.
Disadvantages
- There are often high fees for closing and origination that can be burdensome to borrowers who need the money from a reverse mortgage.
- If the homeowner permanently exits the house soon after closing, it can be difficult to immediately pay the balance on the loan.
- Because the reverse mortgage exchanges equity on the home for cash, the home may need to be sold after the homeowner’s departure if the balance of the loan cannot be repaid, which can remove the possibility of the home passing to the homeowner’s heirs.
The amount of money a borrower can receive for a reverse mortgage can vary based on several factors, including interest rates, current age of the homeowners, and interest rates. However, the amount cannot exceed $625,500. Additionally, the loan is federally insured, so if the lender defaults, the borrower will still receive payments. Finally, any person considering a reverse mortgage is required to talk to a financial counselor, who will help the borrower understand their financial situation and determine if a reverse mortgage is a viable option.
Reverse mortgages are great for homeowners who need a little more cash and want to utilize the equity they’ve accumulated on their home over time. For a person in the right financial circumstances, a reverse mortgage can be a reliable source of money, but for someone with financial complications, they can be harmful. Remember that understanding your financial situation is vital to making the correct decisions with your money, and the NFCC offers many resources, including the ability to speak with a certified counselor, to help you understand your best financial options.