Reverse Mortgages Explained

There are many reasons why someone might want to consider a reverse mortgage. If you are older, have good credit but not the current income, or just want to downsize and keep your home but can’t afford the monthly expenses, this type of mortgage might be the perfect solution for you! Whatever your reasons may be, continue reading to find out more about reverse mortgages and how they can benefit your situation.

Reverse mortgages by definition are a type of home loan that gives borrowers the opportunity to take out money against the value of their home. This mortgage is available for people over the age of 62 and is intended for them to cover some or all of their monthly expenses. There are many reverse mortgage lenders out there besides banks and online lenders. This option is growing in its popularity offering many benefits that traditional home loans don’t.

It allows retirees to stay in their homes indefinitely without having to worry about paying off their loans. Additionally, they are a great way to pay down debt or fund retirement accounts if you have them.

People often get drawn to reverse mortgages because they offer an attractive interest rate. The average interest rate on a reverse mortgage is 2.5%, which is still lower than the rates offered on traditional fixed-rate mortgages. They also offer relatively low monthly payments, which makes them an ideal choice for people who can’t pay their mortgage in full each month but want to keep their house.

Like with any loan, there are a few things to consider before deciding whether this is the right fit for you or not. Be sure to first understand different reverse mortgage pros and cons before deciding to sign on a dotted line.

What Exactly Is a Reverse Mortgage?

The meaning behind a reverse mortgage is that it’s a type that allows homeowners to borrow money using their home as security. Even if you are older, or just want to reduce your monthly payment you can try to qualify for one. A variety of lenders, including banks and online lenders, offer it so the interest rate and other fees associated with taking out this loan can fluctuate.

Don’t settle for the first deal you get and browse around for a bit because you can surely get a better offer. A reverse mortgage often seems like a good option to many people who just want to stay in their homes but can’t afford traditional fixed-rate mortgages anymore. Funds acquired this way can be used to cover some everyday expenses like bills or for covering the debt. Before you actually decide on anything think about the amount you can borrow, whether you need to pay taxes on the loan forgiveness, and whether you’re eligible for government assistance such as Medicare or Social Security.

You can even find a reverse mortgage calculator online to help you get an estimate of the amount you can get based on your circumstances.

How Does a Reverse Mortgage Work?

Now that we explained what reverse mortgage is let’s take a closer look at how it works.

First, the principle behind the amount of money you can borrow is based on your home’s current market value, not its original purchase price. After you took out the funds, you will need to pay the lender back with interest monthly or however you chose before signing.

With this loan there’s no prepayment penalty – you can actually withdraw money from your reverse mortgage at any time without penalty for doing so. Most commonly, this type of mortgage is used by people who are not able to qualify for a traditional mortgage because of low credit scores or debt levels. Reverse mortgage funding can be received through a line of credit, as a monthly payout, or in a lump sum, it all depends on your preference.

What Types of Reverse Mortgages Are There?

There are a couple of different types of reverse mortgages available to borrowers and mortgage lenders. The one that is probably used the most is a reverse mortgage for seniors. This type allows retirees to borrow money against their home equity so they can pay off their outstanding debt or save some money in their retirement funds. Other types include reverse mortgages for people with disabilities and reverse mortgages for first-time homebuyers. There is also a Single-purpose reverse mortgage which is the least in use. Borrowers typically avoid this loan type because lenders here restrict how the funds can be used. As its name implies, homeowners can only use this money for a single, lender-approved item.

If you’re interested or planning to apply for a reverse mortgage, we suggest you speak with a lender who specializes in this type of financing.

Reverse Mortgages: Pros and Cons

Reverse mortgages are getting more and more popular, but are they really the best option for you? Let’s take a look at the benefits and drawbacks of this type of loan.

Pros

• Can help you get a lower interest rate on your loan.
• The process of applying isn’t as complicated as it may seem.
• You can get the needed funding within 30 days.
• There are not many restrictions on who can get a reverse mortgage.
• You can use these funds to pay your existing home loan.
• Can help you secure your retirement

Cons

• You can lose your home in foreclosure
• Your heirs will be responsible for paying it back if you don’t do it yourself
• There are still mortgage payments that you need to pay regularly
• It’s not free- even if you do not need to make payments monthly, there are still many expenses associated with this loan type such as origination fees, upfront insurance, etc.

These are just a few things to keep in mind. Be sure to carefully assess and weigh them out before you submit any application.

What Are the Requirements for a Reverse Mortgage?

There are not that many requirements you need to fulfill to be able to qualify for a reverse mortgage and they do differ from traditional mortgages:

• The home must be your primary residence and be in good condition.
• You must be at least 62 years old and have a good credit history.
• You must prove that you are able to afford the monthly payments.
• The loan amount you want to get cannot exceed the current value of your home.

Is it a Good Idea to Get a Reverse Mortgage?

Now that you’ve got familiar with what reverse mortgages are and how they work, let’s discuss whether are they a good option.

By taking out a reverse mortgage, the borrower obtains money against their home equity, with the possibility of using the money to pay off other debts or expenses. This option is popular for people who are retired or have low incomes and can no longer afford the traditional mortgage.

The biggest risk associated with a reverse mortgage is that the value of your home may decline below the loan amount, leaving you with a large debt and no home. In addition, interest rates can be high if you do not seek a good deal and negotiate everything before committing.

Bottom Line

Reverse mortgages are one of the more popular options these days for people who want to borrow money against their home. With gaining this popularity comes the great interest in this specific loan type. We already talked about how it can be a good option if you’re planning on refinancing your home soon or if you are above a certain age with not that good income anymore.

However, they aren’t the best fit for everyone’s situation. They often require some sort of down payment and also there are some alternatives that can fit your personal circumstances better. While we cannot tell you what to do, we gave you an in-depth explanation of what exactly you will get yourself into. In case you’re considering taking out a reverse mortgage, we advise you to talk to a financial advisor about your specific situation and your needs and goals, just to make sure you understand both sides of the coin.