Is a Reverse Mortgage Right for You?
The oldest of the baby boomers began turning 65 on Jan. 1, 2011. On that day and on each day thereafter for the next 19 years, approximately 10,000 people will reach the age of 65, according to the Pew Research Center. As they grow older, this significant segment of the population will face a range of challenges, including the ability to age in place. First introduced in 1989, reverse mortgages could be the ideal solution.
What Is a Reverse Mortgage?
Reverse mortgages are designed to make it possible for seniors age 62 and older to tap into the equity of their homes by reversing payments so that the lender actually sends payments to the borrower. As the baby boomer generation continues to age, it is expected that reverse mortgages will continue to gain in popularity as an effective method for covering living expenses.
Compared to traditional mortgages, which begin with a large balance that decreases as the borrower pays the lender, reverse mortgages work in exactly the opposite manner by beginning with a zero balance that increases as the borrower is paid by the lender. In order to qualify for a reverse mortgage, the following requirements must be met:
The homeowner must be a minimum of 62 years of age.
The homeowner must own the home outright or have a mortgage with a balance low enough that it can be paid off with a new loan.
The subject property must be a single-family home or a two- to four-unit home with at least one unit occupied by the borrower.
How Much Can You Borrow with a Reverse Mortgage?
The amount of money that you are able to borrow with a reverse mortgage is determined based on a variety of factors, including the value of your home, the applicable interest rate, your age, and the amount of any liens against your home. In the event of multiple borrowers, the age of the younger borrower is used. Generally speaking, the more equity that you have in your home and the older that you are, the more money you will be able to receive.
The proceeds from a reverse mortgage can be accepted in five different ways. You may:
Receive payments on a monthly basis for a specified period of time.
Receive payments on a monthly basis for life.
Receive the entire balance of the loan as a lump sum.
Establish a line of credit.
Choose a combination of the above options.
For homeowners considering a reverse mortgage, it is important to understand that you may be required to attend counseling sessions prior to completing your reverse mortgage. The goal of such counseling is to ensure that you understand what you are committing to prior to taking out a reverse mortgage loan.
Heirs and Reverse Mortgages
So, what happens after you are gone and the property changes hands? One of the most common misconceptions regarding reverse mortgages is that the lender will receive an equity share in the property, according to a report published by The New York Times. This is actually not the case. A relationship does exist, but it is similar to the type of relationship that exists between any lender and borrower.
As a first lien holder on the home, the lender will be entitled to being repaid before any other lien holders when the property changes hands. Federal regulations stipulate that the lender must provide heirs with up to 30 days to make a decision regarding how repayment will be handled. Repayment will often depend upon the amount of equity left in the home as well as whether heirs have a desire to keep the property. After making a decision regarding repayment, heirs are then able to take up to six months to arrange financing or sell the property. If the home fails to sell for a sufficient amount to pay back the loan in full, heirs will not be responsible for any shortfall.