What if you are retired and discover that your retirement income isn't enough. Or perhaps you need some money to pay for home care or to help finance a grandchild's education. The reverse mortgage may be for you.
The reverse mortgage allows homeowners to withdraw the equity from their home. It is a new variation of a traditional mortgage - instead of the balance falling as you make payments, it rises. There are no restrictions on what the money can be used for: living expenses, investment, travel, renovations and debt reduction. There are no payments due until the property is sold or the borrowers die. At which time the entire balance is due. The amount of the loan is between 10% - 40% of the fair market value of the home. The amount is based on borrowers age, the older a person is the larger the amount that can be borrowed as the repayment is anticipated sooner. The title of the property remains in the homeowners name, and the homeowner is able to live in the home as long as they want.
The loan is based on several factors and borrower(s) must:
- Be 62 or older
- Own house outright or have substantial equity
- Applicants can be single or married
- Property must qualify and meet lender's qualifications
The interest rate is usually slightly higher than on typical financing and the rate is adjusted annually. The interest is added to the principal each month.
The reverse mortgage is not for everyone but it can be very beneficial for some people. Consider a reverse mortgage if:
- Your income is too low to qualify for a conventional mortgage or line of credit.
- You don't wish to increase the amount of debt against your house and/or you don't want to make monthly payments.
- You are comfortable with the decision to deplete your estate and not leave much of an estate.
Since the mortgage must be repaid upon death of the borrower. The heirs will have to either sell the property or repay the loan out of their own resources and keep the home. It is important to remember that since no payments are required, when the mortgage is finally repaid, the debt could equal the bulk of the equity in the property, so you may not be able to pass the property on to your family.