With rising inflation rates, many elderly are finding it difficult to survive on their monthly social security check. While looking for a new method to finance their cost of living, most oversee reverse mortgages. According to Bloomberg, less than one percent of eligible homeowners take out a reverse mortgage due to a lack of knowledge. What is a reverse mortgage, and how does it work? Read here to find out.
What is Reverse Mortgage?
A reverse mortgage is a type of mortgage loan that homeowners who have paid off their mortgage can take out. However, unlike a typical mortgage loan, the borrower does not have to repay the loan.
While it might sound unbelievable, homeowners that take out reverse mortgages do not have a monthly payment. However, the mortgage loan has to be repaid once the homeowner passes or moves out of the home.
What is a reverse mortgage? To know that, you must first understand how reverse mortgage works.
How Does a Reverse Mortgage Work?
Despite having a rough understanding of a reverse mortgage, most people do not know how it works. This is mainly because they do not understand how it works.
A reverse mortgage allows the borrower to get payments from the lender. These payments have an interest rate like any other loan, but the interest is collected in the balance that the homeowner does not need to pay it all upfront.
The process is fairly simple. The borrower, who owns the house or has more than 50% equity in it, liquefies the property without selling it.
The borrower can work with their mortgage counselor to find a private or governmentally insured lender and apply for the program. Once the credit check and property are assessed, the loan gets approved, and the loan payments are made to the borrower, either in a lump sum or periodically.
Generally, these loans do not have to be repaid until the borrower passes on or the house is sold, in which case, the money earned after selling I used to repay the loans, and the borrower keeps whatever is left.
Types of Reverse Mortgages
Depending on your needs, you can choose between three types of reverse mortgages:
- Home Equity Conversion Mortgage (HECM): HECM is the most common reverse mortgage as they are secured by the U.S Department of Housing and Urban Development. While these are more expensive, these loans can be used for anything. The FHA must approve HECM loan lenders, and borrowers receive a HUD-approved counseling session.
- Single Purpose Reverse Mortgage: These reverse mortgages are the least expensive type and give loans for purposes approved by the lender, such as repairs. A non-profit organization offers these loans, and they are usually small in amount.
- Proprietary Reverse Mortgage: Private organizations offer these reverse mortgages with their eligibility criteria and interest rates. While they offer a large loan, there is considerable risk involved. These organizations are not secured by government agencies and often scam their borrowers.
You must also know how to receive these loans before you apply. The different ways you can receive these loans include:
- As a Lump sum that has a fixed interest rate.
- As equal monthly payment, given that the borrower lives in the home.
- Term payments are where a borrower receives the loan sum as monthly payments over a specified number of months.
- As a line of credit, the borrower only takes the money whenever and how much he needs. The borrower will only pay interest on the amount borrowed.
- As a combination of monthly payments and a line of credit where the borrower takes the money only when they occupy the property, the borrower can borrow more if needed.
- It is a combination of term payment and line of credit where the borrowers take the money in payments over a specific number of months and can borrow more if they need it, even after the term.
Who Can Apply For a Reverse Mortgage
Before you start wondering “what is a reverse mortgage” and carry on with your application, you must know if you qualify for it. The criteria to be able to apply for a reverse mortgage is:
- You must be 62 or older
- The borrower own the property or have more than 50% equity in the property.
- You must occupy the property.
- The borrower should be debt-free or have little debt left.
- You must be able to pay for property tax and homeowner’s insurance
- You must attend a HUD-information session.
Pros and Cons of a Reverse Mortgage
Below are some pros and cons of a reverse mortgage.
- Borrowers do not need to make monthly payments
- Reverse mortgage provides money for health care, debt clearing, bill payment, or for enjoying retirement.
- It reduces the financial burden on the elderly
- It can prevent foreclosure
- Borrowers do not repay the loan from pocket
- Borrowers have to pay property tax and homeowner’s insurance
- The total loan repaid, including the interest, can be significant
- There are chances of a scam
- Borrowers can only apply if they have repaid a considerable amount of their mortgage loan.
Reverse Mortgage Alternates
While reverse mortgages can help some people, some might not like the answer they get for what is a reverse mortgage. However, there are many other alternatives:
- Downsizing: If you are having trouble paying to afford the large house once your children leave, sell the house and move into a smaller one. This can cut down on costs and give you funds.
- Refinancing: If you do not qualify for a reverse mortgage because you have not paid off your loan, you can refinance the loan to lower monthly payments to make it easier to afford.
- Home Equity Loan: these loans allow you to borrow against the equity in your homes.
How Robert DeFalco Realty Can Help
What is a reverse mortgage? Instead of wrecking your brain, Robert DeFalco Realty has extensive experience in real estate and financing and can help you finance your expenses. The Robert DeFalco real estate agents can help you downsize your home or connect with a mortgage lender.
Call Robert DeFalco Realty at 718-987-7900 or visit the New York offices.