There are plenty of jokes about what happens when you play a country song backward, but what happens when you switch directions with a home loan? How does a reverse mortgage work? Could this twist on a traditional home loan be a smart choice for you?
How Does a Reverse Mortgage Work?
With a normal mortgage, you use funds provided by a lender to purchase a home. The property is used as collateral, and you pay back the loan in monthly installments. Reverse mortgages flip this model. Instead of paying your lender, your lender pays you. As the Federal Trade Commission explains, a reverse mortgage converts the equity in your home into one or more cash payments. The reverse mortgage comes due when you sell the home, move out of it, or die. Then, you, your spouse, or your estate has to repay the loan, including both the principal and any accumulated interest. Depending on the circumstances, this may require selling the property.
Who Can Get a Reverse Mortgage?
Reverse mortgages aren’t available to every homeowner. For starters, anyone interested in getting a reverse mortgage must apply to and be approved by their lender. Anyone hoping to qualify for a reverse mortgage must also meet the following criteria (source):
- Borrowers must be 62 years of age or older.
- Borrowers must be free of any federal debts.
- Borrowers must have the resources needed to continue paying property taxes, insurance, homeowners association dues, maintenance costs, and other expenses related to the home.
- The home must be either fully paid off or nearly paid off.
- The home must be the borrower’s primary residence.
How Much Can You Get with a Reverse Mortgage?
According to The Balance, two factors determine how much cash you can get with a reverse mortgage. The first is your equity. Generally, the more equity that you have available, the more money that you can get. The second factor is your age. Older borrowers typically get higher payments. While it may be tempting to leave a younger person off the loan to secure more cash, experts urge caution. If a younger person isn’t on the loan and can’t pay it off, they will lose the home if the older borrower dies or moves out.
How Do You Receive Payments?
When it comes to payments, how does a reverse mortgage work? As Investopedia explains, you have six options:
- A Lump Sum Payment: You’ll receive your total payment when your loan closes.
- Term Payments: You’ll receive monthly payments over a set period of your choosing.
- Equal Monthly Payments: You’ll receive monthly payments for as long as you use the home as your primary residence.
- A Line of Credit: You can borrow money as needed and will only pay interest on the amount borrowed.
- Term Payments and a Line of Credit: You’ll receive monthly payments over a set period of your choosing and have the option to access more funds during or after this period via an established line of credit.
- Equal Monthly Payments and a Line of Credit: You’ll receive monthly payments for as long as you use the home as your primary residence and have the option to access more funds via an established line of credit.
Is a Reverse Mortgage the Right Choice?
How do you know if a reverse mortgage is the right choice for you? According to USA Today, if you plan to stay in your home for a long time, have a sizeable amount of equity, and don’t want to pass your home to your heirs, a reverse mortgage can be a good way to drum up cash during your retirement. However, if you are uncomfortable with the complexity of a reverse mortgage or intend to leave your home to your heirs, you might discover that refinancing, securing a home equity loan, or downsizing is a better option.
How does a reverse mortgage work for someone in your situation? Are there other options that might be better for your needs? At PrimeLending Twin Cities, we know that home loans aren’t one-size-fits-all financial products. We listen carefully to develop a solid understanding of your housing goals and work with you to determine the best strategy for reaching those goals. To discover how our friendly, knowledgeable loan experts can help you, contact us today.