Simply stating, a Reverse mortgage is a loan that
enables homeowners (age 62 and older) to convert part of their
equity in their home into a tax-free income without having to
sell their homes, give up the title, or take on a new monthly
mortgage payment. Many homeowners are using this to supplement
their retirement income, pay for their health care, modify their
home, or just get some cash for emergencies. Since it is a new
product, some people might have misconceptions of what a reverse
mortgage is? The bank doesn’t give you money and take away your
house. Let’s look at some of the most common questions?
Is reverse mortgage for desperate people? The answer is No,
because it is an excellent financial planning tool used from
people by all walks of life.
How do I qualify? You must be atleast 62 or if both parties are on
the mortgage, then you both must be at least 62. And, you must
also have equity in your home.
What happens if I still owe on my home? You may still qualify even
if you have a balance on your first mortgage. The proceeds
must be used to pay off the mortgage, first.
How much can I get? This depends on several factors such
as, the age of your home, the value, your age at the time
of closing, and interest rates.
Is it just monthly payments? No. You can get a lump sum,
line of credit, monthly payments or a combination of monthly
income and a line of credit.
But, won’t I have to pay taxes on these monthly payments
to the government? No. The funds are tax-free. Its your money,
not additional income.
Should I seek a lawyer or receive some counseling before
I get a reverse mortgage. Yes. You must be counseled before
receiving a reverse mortgage. You don’t have to talk to a
lawyer or accountant, but it would be advised.
Who owns the title to my house? You still own the
title.
What happens when I die? Once your home is passed on to your
heirs, the mortgage becomes due. Your heirs may pay the mortgage
and keep the home or sell the home and pay off the home. They
may keep any excess sales proceeds.
What if I owe more than the house is worth? You can’t. Your
repayment amount will never exceed the value of the home at
the time the loan comes due. Also, there are no prepayment
penalties.
To compare Reverse mortgage to a more traditional one, the
type of mortgage commonly used when buying a house can be
classed as a “forward mortgage”. To qualify for forward mortgage,
you must have a steady source of income. Because the mortgage
is secured by the asset, if you default on the payments, your
house can be taken from you. As you pay off the house, your
equity is the difference between the mortgage amount and how
much you’ve paid. When the last mortgage payment is made,
the house belongs to you.
On the other hand a Reverse mortgage process doesn’t require
that the applicant have great credit, or even that they have
a steady source of income. The major stipulation is that the
house is owned by the applicant. Generally, there is also
a minimum age required as well, the older the applicant, the
higher the loan amount can be. As well, reverse mortgages
must be the only debt against your house.
It is different from conventional “forward mortgage”, your
debt increases along with your equity. Instead of making any
monthly payments, the amount loaned has interest added to it -
which eats away at your equity. If the loan is over a long
period of time, when the mortgage comes due, there may be a
large amount owed. Furthermore, if the price of your home
decreased, there may not be any equity left over. On the flip
side, if it was to increase, this could allow for an equity
gain.
Before deciding how to draw money from the reverse
mortgage, there are a few options you should keep in mind; a
single lump sum, regular monthly advances, or a credit
account. There are conditions in this kind of mortgage that
would warrant the immediate repayment of the loan; the
mortgage will be due when the borrower dies, sells the house,
or moves out.
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