What is a Reverse Mortgage Loan? How does Reverse Mortgage work? What are the Pros & Cons of a reverse mortgage loan and is it right for you now or in the future? The right answers to these questions will be discussed in this video. Subscribe to our channel for more of everything real estate to keep you informed.
A reverse mortgage loan is a type of loan where homeowners are allowed to borrow money against the value of their house. This loan does not have a monthly repayment commitments like other loan. They are structured for the elderly, and the loan value, plus accrued interest, is calculated not to exceed the value of the house over the tenure of the loan. Repayment is only made when the homeowner dies or decides to sell the house. For a house to qualify for this type of loan, there must be no liens held against it. The aim of this loan is to make available funds that those on retirement can access to enhance living conditions.
Now to the next question; how does reverse mortgage work? Well, it works for those who are at least, sixty-two years old. If you are younger still want to monetize on your home the options available for you will be either renting or selling. Maybe your father is considering a reverse mortgage and you want to understand how it works to help him decide, or you are planning your retirement and want to understand how you can incorporate it in your future cashflow. Normally, what happens with a mortgage loan is, you speak to a lender about buying a house for you so you make monthly payments and build equity in the house, and then gain full ownership after you have fully paid off the loan. Reverse mortgage works in the exact opposite and that is why it’s called reverse mortgage. The lender makes payments to you instead. You get to earn income which is calculated based on the market value of your home. You get to also decide how you receive that money; you’ll have the monthly option, the lump sum option, or a combination of the two. It all depends on you and what you need the funds for. Remember, that you don’t lose ownership of your home even if you receive a lump sum payment for your home. This is because, as I stated earlier, the value which will be made available to you will be lesser than the market value of your property. The money you will receive however, accrues interests, and that can be fixed or variable. Interest will continue to compound over the tenure of the loan until it is fully paid off. Reverse mortgage is technically trading equity for debt. So you will be exchanging ownership for debt so expect your debt exposure to increase. All the money you get will effectively be small loans every month against the equity of the house and those small loans all include interest.
Let us now take a look at a few advantages of reverse mortgage which may help you decide if it is right for you or a family member.
Most people retire with their mortgage loans fully paid off. In that period where there is no more strength to work, reverse mortgages may come in handy. Old age also comes with some inevitable health issues. More money will be required to stay in good health and once working is off the table, cashing in on your house might just be lifesaving. Also, the older you are, the more money you can access.
You do not lose ownership of your home, until you decide to sell it or pass away. You do not have to worry that someone will be knocking on your door claiming ownership of your house.
There is no good credit score requirement to be eligible for reverse mortgage loans. Your credit history becomes irrelevant applying for a loan. The only thing required is full ownership of the house without any liens.
The convenience of spending what you receive over time or as a lump sum payment, or a combination of the two can help you in many ways depending on your situation and what you need the money for.
The disadvantages are fewer though, but let us still take a look at them.
You get to forfeit the opportunity to pass on a property that your children could have benefitted from. Considering how you may have struggled with mortgage payments, you would have wished to make life easier for your children and left the house as their inheritance but a lender will have to resell it to retrieve the money given to you plus accrued interest. Your children or next of kin only gets the little that will be left after the lender has fully recovered your debts and accrued interests.
There are costs involved with accessing a reverse mortgage loan and that can go as high as $40,000 which will be incorporated into the loan you receive. These costs may include mortgage insurance fees, appraisal fees, mortgage agent fees, title insurance fees, and many more. Compared to a regular loan, that is way too much.
If you ever have to move out of the house you used for the reverse mortgage loan for at least a year, you may be required to pay off the loan. That can create some massive inconvenience.
The question about it being right for you now can only be answered if you are at least sixty-two years. If you do not have any heirs, then the decision becomes easy. If you have made other investments to cushion them in the future, then that makes requesting for a reverse mortgage also easy. Maybe you could not make a better retirement savings because you were making mortgage payments throughout your career life. This may be your only option. Whatever you do, understand your situation and know what is best for you and your family.
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Once again, thanks for watching, This is Christian from San Diego County HomeBuyers – The real estate team you love & know – we’re the team that knows your home: San Diego
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