A reverse mortgage lets you borrow money from the equity in your house, without any monthly payments. The loan is only repaid when the house is sold, or the property owner passes away. If you are considering a reverse mortgage loan, start by understanding how one works and how it will affect you now and in the future.
If you are a senior and a homeowner and short of cash to make ends meet, a reverse mortgage could in some situations be a lifesaver. That’s because a reverse mortgage can be used to tap your home equity – that’s the market value of your house minus the outstanding balance on any existing mortgages – for cash.
Reverse Mortgage Basics
To qualify for a reverse mortgage, you must be at least 62 years old, live in your house, and pay off any existing mortgages on the property. Your income and credit rating won’t affect your eligibility. How much money will be available depends on the value of your home, government or lender limits, your age, current and future interest rates, and the fees collected by the lender and intermediaries.
In a reverse mortgage, a lender gives you money in exchange for a mortgage against your house. That money may come in a lump sum, in monthly payments for as long as you live in your house, in larger monthly payments for a set time period, as a loan commitment that you can call upon in the future, or in some combination of the above. The lender’s mortgage on your house generally can’t be exercised until you die or move out. In the meantime, you get to stay in your home. You keep the title. And the lender can’t seek repayment by making a claim against your other assets.
What to Consider When Looking at a Reverse Mortgage
There are certain things to consider before you decide to move ahead with a reverse mortgage. These include:
Reverse mortgages are best suited for seniors who plan to remain in their homes for several more years. Because the initial cost to set up a loan is higher than for other home equity loans, you must remain in your home for an extended period in order to make the loan more cost effective.
Payments from a reverse mortgage could also affect your eligibility for assistance from some government programs. Be sure to check with the provider of any benefits that you are collecting or for which you may be eligible in the future, including Supplemental Social Security Income, Medicaid, and food stamps.
If you get a proprietary reverse mortgage, there are no set limits on how much you can borrow. All limits and restrictions are set by individual lenders. However, when using a government-backed reverse mortgage program, homeowners are prohibited from borrowing up to their home’s appraised value or the FHA maximum claim amount ($765,600). Instead, borrowers can only borrow a portion of their property’s value. Part of the property’s value is used to collateralize loan expenses, and lenders also typically insist on a buffer in case property values decline. Borrowing limits also adjust based on the borrower’s age and credit and also the loan’s interest rate.
A reverse mortgage isn’t a good way to get money to invest or spend on luxuries or other items that aren’t necessities. However, a reverse mortgage can sensibly be considered when you need to cover big expenses or fill a hole in your budget. Still, make sure that the cash or credit line generated by your reverse mortgage will be enough to cover the immediate and future costs of those requirements. And remember that you will still be responsible to pay property taxes, homeowners’ insurance premiums and for home repairs.
It’s also smart to consider your alternatives. Some jurisdictions offer seniors property tax credits or abatements. Some offer inexpensive loans for home repairs. Also, if you can qualify for a home equity or other type of loan, compare its price and terms to a reverse mortgage.
If you have questions and you need help, please contact us.
American Star Mortgage has helped many first-time homebuyers across Southern California find the perfect home loan. With years of mortgage experience, our team prides itself on assisting our clients in understanding all the elements of the refinancing process. Contact us at (844) 880-6296 or email us at [email protected]