What is the reverse mortgage?

Type of mortgage loan

What is the reverse mortgage?

A reverse mortgage is a type of loan that allows you to earn money from your home equity without selling your property. This is sometimes referred to as “equity release.” You can borrow up to 55 percent of the current value of your home.

However, the maximum cost you can borrow depends on:

i) Your age 

ii) Your lender

iii) Your home’s appraised value

Unlike forward mortgages used to purchase houses, reverse mortgages don’t require the homeowner to pay monthly installments. Alternatively, the entire mortgage credit becomes due and payable when the buyer dies, sells the house, or moves away permanently. 

Federal regulations request lenders to structure the transaction so that the loan amount does not exceed the home appraisal value. If the loan balance exceeds the house’s total worth, the borrower or the borrower’s equity won’t be responsible for paying the difference. 

Eligibility for a reverse mortgage

To qualify for this mortgage, you should be:

  • a homeowner
  • 55 years or older 

You may include all homeowners mentioned on your home title and documents when applying for a reverse mortgage. More so, all the listed individuals should be at least 55 years old to be eligible for a loan. 

Your lender will demand independent legal advice from you and other homeowners. Whenever you apply for the reverse mortgage loan, your creditor will consider:

  • Your age, as well as the age of other individuals registered on the house title 
  • where you live
  • The present condition of the house, its type, and the estimated property value.

The home you use for a reverse mortgage should be your primary residence, which means you must live in the rental house for at least six months.

How does a reverse mortgage work?

You have to repay and close any outstanding loans or credit lines guaranteed by your home before taking a reverse home mortgage. This may include mortgages and home equity lines of credit (HELOC). More so, the borrowers would use mortgage money to repay these costs.

You can also use the remaining loan for the following purposes. 

  • for repairs or renovations 
  • to help pay monthly bills 
  • cover medical expenses 
  • to repay debts

Reverse mortgages may restrict other financing alternatives, so you won’t be able to secure a HELOC or similar loan products. However, you can earn money from your loan by:

  • borrowing the money as a one-time lump sum
  • borrowing some money first, and then receiving the remaining cost over time.

Contact your lender to learn about the different payment methods they offer for reverse mortgages. Also, inquire whether there are any mortgage restrictions or extra fees.

How to recover a borrowed loan

You don’t need to make any regular repayments on a reverse mortgage. It is essential to note that you have the alternative to pay the principal balance and interest charges at any time. However, you may need to return a payment to complete your reverse home mortgage early.

You must repay the debt if the following situations occur: 

  • You sell your house 
  • Move out entirely from your home
  • The last borrower dies 
  •  A default in loan payments

You could default on your reverse home loans by:

  • using a reverse mortgage to pay any illegal costs
  • being dishonest in processing your mortgage application
  • letting your home fall under a state of disrepair that would decrease its worth
  • not following any terms or conditions in your reverse mortgage contract

Every lending institution has its criteria for setting default on a home mortgage, so communicate with your lender to determine the possible reasons for failure.  

The deadline for paying a reverse mortgage may vary. For example, if you die, your estate may have 180 days to refund your mortgage. However, if you turned in long-term care centers, you might have a one-year turnaround time. Finally, contact your lending institution for information concerning the timing for repaying a reverse mortgage.

The cost of a reverse mortgage

The expenses associated with reverse home mortgages may include:

  • Higher interest rates than traditional mortgages 
  • a home appraisal cost
  • a setup cost
  • early repayment penalties if you repay your mortgage before the deadline

The prices will vary depending upon your lending institution. Some charges may be added to the total balance while requesting others to repay upfront. 

Where to get a reverse mortgage

In the U.S., different financial companies offer reverse mortgages. RateChecker.com (for instance) provides the unique Home Income Plan, which is available across the country. You may acquire a reverse mortgage directly from HomeEquity Bank or through a mortgage broker.  

Before getting a reverse mortgage, shop around and research your options. Your financial institution may grant other loan products that meet your requirements. 

Compare the prices of the following possible alternatives to the reverse loan mortgage:

  • getting other types of loans, such as credit lines or credit cards and personal loans
  • exchanging your house
  • acquiring a smaller residence
  • renting another apartment or house

You may speak to a financial advisor and your family when applying for a reverse mortgage. Make sure you understand how reverse mortgages work and how it affects your homeownership over time. 

Pros and cons of a reverse mortgage

Before you decide on a reverse mortgage, remember to scrutinize its advantages and disadvantages.

Pros

  • You don’t need to pay monthly installments.
  • You are not required to repay tax on your borrowed money. 
  • This money will not affect OAS or retirement benefit provided by guarantee income assistance (GIS)
  • You still own your property
  • You have options to select when and how to receive funds.

Cons

  • Interest rates are higher than other types of mortgage
  • When the loan accrues interest, your home equity may decrease
  • Your property must repay the loan and interest within a specified time after your death
  • The time required to settle an estate might be longer than the time allowed to pay back a home mortgage
  • Your estate may have limited funds to support your children or other beneficiaries 
  • The cost of repaying a mortgage may be higher than a traditional mortgage or other loans product.