A reverse mortgage is a loan that allows senior homeowners to convert a portion of their home equity into cash. Unlike conventional mortgage loans, which require borrowers to make monthly payments to their lender, these loans actually pay the borrower. Borrowers are not expected to repay their loan until they decide to sell their home, pass away, or stop using the home as their primary residence. These loans were essentially designed to help seniors pay off their existing mortgage balance and enjoy financial security during retirement.
Reverse Mortgage for Seniors: Exactly How These Loans Work
To qualify for a senior reverse mortgage, consumers must be at least 62 years of age, own an approved property, and have little or no remaining mortgage balance. Approved properties include single family homes and two to four until residences, as well as manufactured homes and condominiums built after 1976. To get a reverse mortgage for seniors, a borrower's home must also meet the minimum property standard set by FHA. If a home needs certain repairs, the funds necessary to complete these repairs will be taken from the borrower's loan proceeds. This means that cosmetic and structural damage to one's home will not necessarily disqualify the individual from getting a senior reverse mortgage.
Individuals interested in getting a reverse mortgage for seniors must also attend one HUD-approved counseling session. During this session, potential borrowers will discuss the benefits and disadvantages of getting a loan with an approved financial counselor. After completing counseling, seniors will submit their application and counseling certificate to their lender.
Upon approving the application, the lender will determine how much the borrower is eligible to receive. Payouts are based on a borrower's age, interest rate, property value, and equity. Before getting a loan, borrowers must also decide how they wish to receive their loan proceeds. Borrowers can choose to receive their money in one lump sum, a line of credit, monthly payments, or a combination of these options.
Is a Senior Reverse Mortgage a Good Idea?
One of the greatest benefits of these loans is that they let borrowers defer payment until they are no longer occupying their home as their primary residence. At this time, the home will usually be sold to repay the loan balance. Because federally-insured reverse mortgages, or HECMs, are non-recourse loans, borrowers cannot owe their lender more than their home is worth. This means that seniors can live in their home throughout retirement without worrying about mortgage payments and possibly enjoying extra cash.
Still, many people wonder if these loans are a good idea. Before getting a reverse mortgage for seniors, borrowers are urged to consider all of their different options. One's home equity is a significant asset, and the decision to get a loan is not one to be taken lightly. To protect this asset, seniors should avoid borrowing against their equity until absolutely necessary. However, for seniors who are struggling to make their mortgage payments, need money for large medical bills, or do not have enough cash to afford their daily expenses, a reverse mortgage can be a hugely beneficial financial tool.