A reverse mortgage is a boon for senior citizens who had worked all their life to leave back something for their children. The lender pays the money for the customers instead of the other way around in this process. Senior citizens who face unexpected money issues to pay for their health care, fund their children, or repair their home or wish to travel can utilize this feature most banks are obliged to give them.
1. Reverse mortgage – what it is and what it isn’t?
“Leveraging the equity of the home” is the legal term for a reverse mortgage. If you are a senior citizen in the US aged above 62 and own a property or a home, you can get a reverse mortgage. In short, you are pawning the house again to get some money. How is it different from getting a second mortgage?
There is no need to pay the loan back until the owner dies or sells the home or moves out of it to join a nursing home or care-taking facility. The loan is tax-free as the homeowners or the senior citizens only borrow a part of the home’s actual equity.
A reverse mortgage is not an elderly loan or government benefit given to them without monthly repayment. The money has to get repaid during their death through insurance, bonds, or stock, or the bank will take control of the house. The heirs of the older people can also pay back the loan.
2. Reverse mortgage – simplified process
The government-created reverse Mortgage or RM initially to help the senior citizens facing foreclosure, unable to pay their home debts. The banks or the government will allow them to borrow a particular percentage of their home equity as cash.
The senior citizens will pay the money to clear debts, escape bankruptcy or foreclosure, and stay in the home until they die. The bank will control the house or insurance to collect the amount with interest after they die or move out to an assisted facility.
The bank will give the remaining amount to their heir, nominee, or the dependent. The spouse of the RM taker can live in the home till they die or choose to move out. The mortgage takers also have the facility to pay off only the loan’s interest or pay back the loan partly if they can afford it.
- Variable interest rate loans often ask for equal monthly payments or utilize a line of credit or a combination of both for a specific time. People who want to leave the property to their heirs often select this option.
- Loans with fixed interest rates will allow the elders to get a lump amount as one payment, and the government will collect it after death. Elders who want a massive amount for home renovation, meet living expenses, or manage a medical emergency choose this type of loan.
3. Prime requirements
- Only people above the age of 62 can apply for a mortgage. The property or home should get registered in their name.
- There should be no other mortgage or associated debts on the property listed.
- The elder and their spouse must live in the home as primary residents. Others can live in different parts of the house as tenants.
- Banks will provide loans for buildings having up to four living units.
- Even massive condominiums are eligible to get the mortgage if they got built after 1976.
- The bank or organization lending the funds will examine the property and certify whether it is in good condition.
- The residents should have paid all the property taxes, insurance, and dues on the house regularly for the past few years.
4. Three types of reverse mortgages
Home Equity Conversion Mortgage or HECM: This federal loan is the most common and easy to get RM load. The Federal Housing Association or FHA arranges for the loan after screening and counselling the elderly citizens, examining their house, and checking their mortgage history for the past few years.
Older people get advised to use the money carefully and plan their budgets wisely when they receive the loan. They are also strictly advised to pay all the insurance payments and the property taxes up-to-date.
Proprietary RM: Several banks offer this kind of loan, especially on huge homes, villas and estates. The senior citizens utilize the money to live comfortably for the next few years, maintain the property properly, or invest the money to multiply it.
Money availed in this loan is much higher than the federal loans and is often invested to pay itself off, and the heirs get custody of the property after their parents’ death.
Single-purpose RM: Non-profit organizations give this loan to help senior citizens struggling financially with a medical need or another grave financial emergency. The loan amount is much smaller than federal or private loans and can be used only for specific purposes, like home repair, meeting life needs, or medical treatment.
Elders who want to avoid becoming dependent on their children avail of this loan. It helps them have financial independence until they die in their own home, and the bank will reclaim the money after they die.
5. Benefits and issues in reverse mortgage
- The major plus points of a reverse mortgage are living independently without asking others for monetary help and enjoying retirement peacefully.
- Living in their own house without monthly EMI hassle and have enough money for healthcare and paying bills.
- They are saving their house or property from bankruptcy or foreclosure, which is emotionally draining.
- Several hidden charges are associated with a reverse mortgage, like the origination fee, service fee, and mortgage insurance premium, accounting for 2% of the loan amount.
- Third parties like the NGOs might also charge a small amount for their service. Older adults get forced by contractors who come to renovate their homes to get a reverse mortgage to increase the property’s value.
- Most are unaware that they have to pay the mortgage in full if they sell the house. They also don’t know their children have to pay off the loans after they die.
Scams: There are various reverse mortgage scams promising veterans, disabled people, and elderly citizens with no income options a considerable loan. These scams often make older people go bankrupt after the cheaters retrieve the money from them.
Alternatives: Elders who want to leave their property hassle-free for their heirs can consider refinancing options. Those who do not want to burden their children with loans to pay after their death can consider downsizing or limiting their expenses and living a simple life.