Reverse mortgages are a type of loan developed for older homeowners with minimal savings and assets besides their homes. It is a type of loan that uses the home as collateral. Older homeowners can exchange equity for cash with zero monthly payments. Unlike traditional loans, a reverse mortgage is due as a lump sum at the end of the loan’s term. The sum is generally paid when a homeowner no longer primarily lives in the home, sells the home, or passes away. The minimum age to get a reverse mortgage is 55 (lowered in 2021). In 2020, the minimum age was 62. This type of loan is typically used to supplement retirement income.
Should You Get a Reverse Mortgage?
A reverse mortgage is a particular type of loan and is generally not an excellent fit for everyone. It has a high minimum age requirement, and other loans could be considered more flexible. Knowing more information about a reverse mortgage can help you decide if it is the right option for you.
High Age Requirement
Reverse mortgages are different from other loans because there is a higher minimum age to acquire the loan. Reverse mortgages were primarily reserved for homeowners 62 and over but have now been changed to 55 in 2021. The government developed the loan type to help lessen the burden of retirement and a retirement fund. As a result, the average person does not qualify for a reverse mortgage as they do not meet the age requirement.
You Can Only Get a Reverse Mortgage on Your Primary Residence
Reverse mortgages cannot be used for properties outside of the primary residence, including but not limited to investment and vacation properties. Since the home is your primary residence, the homeowner must spend more than six months out of the year at the property.
You Still Have to Pay Fees Associated with Owning a Home
Receiving a reverse mortgage does not mean you no longer own the home, which means you are still responsible for fees associated with homeownership. Costs such as home insurance, property tax, and repair fees still need to be paid by the homeowner. Other costs may also apply. It is highly suggested by most lenders to set aside an amount from the loan that is solely reserved for these fees. This will limit the chances of getting into a difficult financial situation.
How Much Can You Borrow?
How much a lender is willing to loan depends on your age, equity, and the amount of mortgage left on the home. The best candidate is an older homeowner with a paid-off house. In 2021, the legal reverse mortgage limit is $822,375. Most lenders will not lend you more than 80% of your home’s value. To reach the legal limit, you would have to be an ideal candidate with a paid-off home valued at a minimum of $1.028 million. This is not the case for most Americans, so do not be discouraged if your approved loan is smaller. Typically, older homeowners can receive a higher percentage of their home’s value.
Four Ways To Get Paid
Reverse mortgage payments can be received in four ways. The lump-sum option will give you 60% of your loan when approved and the remaining 40% the following year. If you decide to forgo the remainder of the loan, you can receive the initial 60% at a fixed interest rate. It is the only payment method that is at a fixed interest rate. The other three ways all operate on an adjustable interest rate. Tenure payments allow homeowners to receive a monthly payment indefinitely until the home is sold or the owner passes away. Term payments enable homeowners to receive a monthly payment for a fixed amount of years. You can also obtain your payment as a credit line where you take out as needed, similar to how a credit card works.
All reverse mortgages are negative amortization loans, so you will always owe your lender more than you borrow. Regardless of the payment method you choose, you will be responsible for both the principal and interest when the time to repay the loan comes.
Should You Get a Reverse Mortgage?
The facts stated above scratch the surface of what you need to know about acquiring a reverse mortgage, but hopefully, it has helped you better understand the concept. If you feel you are a good fit for a reverse mortgage, you should reach out to a local lender, and they will have more specific information for you. A financial counseling session will accompany all reverse mortgage loans, so do not be afraid to reach out and take control of your retirement plan.
Reverse mortgages can be a great retirement option for many homeowners. If you are still struggling with understanding how a reverse mortgage works, you can learn more at https://reverse.mortgage/how-does-it-work.
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