An overview of reverse mortgage and how it works
Reverse mortgage for seniors is a loan available for senior homeowners, who are about 62 years or older, and it requires no monthly mortgage payments. The idea of reverse mortgages for seniors was conceived as a means to help retired seniors with limited income, such that their basic monthly living expenses are covered as well as they can pay for health care. The loan is referred to as a reverse mortgage because instead of the borrower making monthly payments to the lender, as with a traditional loan, the lender makes payments to the borrower. The borrower is not required to pay back the loan till the house is sold or in any other case, vacated.
The reverse mortgage transaction rules may vary depending on the laws of the jurisdiction. The reverse mortgage enables the borrower to always retain the title or ownership of the home. The house is never owned by the lender even after the last surviving spouse permanently vacates the property. It is very crucial that you calculate your belongings with a reverse mortgage calculator before planning for a reverse mortgage. There are various reverse mortgage calculators available online to help you with the calculation.
How does a reverse mortgage for seniors work?
- It is a loan made by the lender to a homeowner using the home as a security or collateral.
- In a traditional mortgage, the homeowner uses their income to pay down the debt over time.
- With a reverse mortgage for seniors loan, the loan balance increases with time because month-to-month mortgage payments are not made by the homeowner.
- The amount of equity that you can access in reverse mortgage depends on the age, current interest rates, and the value of the home.
- It must be noted that you may need to set aside some additional funds from the loan proceeds to pay for taxes and insurance.
How are the funds distributed?
The mortgage loan payments can be done in a number of ways that suit your requirements:
- A line of credit in which you are able to draw the needed funds up to the approved amount.
- As a modified tenure, which means as long as you are in the house, you could use a merger of a line of credit and planned monthly payments.
- As a modified term that combines both monthly payments and line of credit for a certain amount of time, as chosen by the borrower.
- As a tenure wherein monthly payments are done for as long as there is one borrower in the house.
- A lump sum amount that can be paid at closing.
What are the risks associated with reverse mortgages?
- Even though reverse mortgage for seniors is a smart way of supplementing your retirement income, you are spending what would be part of your heirs’ inheritance.
- There may be a decrease in the value of estate inheritance over the time, as proceeds are spent, and there is also an increase in the interest on the loan balance.
- The eligibility for Social Security and Medicare is not affected by the reverse mortgage for seniors loan, but government programs such as Medicaid may be affected.
- It is important to discuss with your family while considering such a type of loan.
What documentation is needed to be given to the reverse mortgage specialist?
The documentation needed may vary from company to company, but it is better to have the following documents:
- A copy of your driver’s license
- Your Social Security card copy
- Your homeowner’s insurance policy declaration page copy
- In case someone is signing on your behalf, a copy of the power of attorney
- A copy of your mortgage statement, if applicable
- You will need a copy of the document if your property is in a trust
- You will need information regarding a court-appointed conservator in case you have one
- Your bankruptcy discharge papers if applicable
- A reverse mortgage for seniors is a very good idea if you are planning to live in your home for a long time and use your equity as a form of a scheduled monthly income, as a line of credit, or both.
- There are other more viable options if you need money only for a short while.