In times of limited funds, we are trying to find out a way to increase pour monthly income. We want to bring the income to a satisfactory level with which we could cover our living expenses, and meet our monthly obligations. Thus we are looking at the different options available to raise enough cash. Elderly population, might be faced with such an issue. Meaning that maybe they have built in equity in their home, and have ownership, but they are faced with inadequate level of income, to live a descent live. One solution, to this problem are the reverse mortgage loans.
The reverse mortgage loan, is one of the many different mortgage loans available for various needs. The loan, is confusing, in terms of the logic behind mortgages we are acquainted. Namely, while with the other mortgages the borrower has to pay monthly payments, with reverse mortgage the borrower can receive monthly payments. Before you rush to apply for reverse mortgage, make sure you understand its advantages and drawbacks.
Reverse mortgage loans explained
Reverse mortgage loans are a form of mortgage available for elderly homeowners, 62 years and older (in some countries the lower limit by be 55 years). Thus type of mortgage allows you to transform portion of the equity in your home into cash. Stated differently, the homeowner can borrow money against the value of the home in his/hers ownership. The aim of the reverse mortgage is to help senior citizens with limited income, but who have equity build up in their homes. The funds from reverse mortgage can be used for instance, increase in monthly income, paying off existing mortgage and/or debt, paying other expenses.
Repayment of the reverse mortgage loans is executed after the death of the borrower, or until the sale of the home. The borrowers pays no monthly payments as long as he/she lives in the home.
Advantages of reverse mortgage loans
Ownership of your home – most misunderstand issue when it comes to reverse mortgage is about the ownership. People thing that the lender is taking over the ownership of your home. This is not the case, you remain the owner of your home, even if you take reverse mortgage. But keep in mind that you are owner of your home, as long as you do not violate any terms. In addition, paying taxes and insurance is you obligation.
Monthly payments – although other types of mortgages require for you to pay monthly payments, this is not the case with reverse mortgage. Not paying monthly payments is one of the biggest benefit for this type of mortgage. With reverse mortgage, the monthly payments are made to you. Yes, that’s right, you will receive monthly payments. You will receive the monthly payments as long as you live in your home. This type of mortgage is repaid if you sell your home, change the primary residence, or when the remaining borrower leaves home.
Market value of your home – means that the value of your home can change over the years. If the value is increased than there is nothing to worry about, even if you have mortgage. But, the negative aspects come when the market value of your home declines. This is posing a problem when you have a mortgage, and even worse, when you want to sell your home and pay off your mortgage. Thus, in relation to market value, reverse mortgage is superior over other types of mortgage loans. The reverse mortgage loan is a loan insured by the federal government, thus followed by a higher level of protection. In case of fall in market value of your home, the value of your mortgage will be higher than property’s sale price. Because reverse mortgage loan is insured, the government insurance has the obligation to cover the difference between the mortgage loan amount and the sales price of your home. Thus you will never owe more that the value of your home.
Multiple payment choices – since this mortgage is a product for the senior i.e. elderly population, it offers different payment options. Each of these options are adequate to cover different needs. Thus, the payment method is chosen by the borrower. The borrower can choose any of the following payout options: receiving full or partial amount of fund, a line of credit, monthly payments, as well as combination.
Tax benefits – because the reverse mortgage is a form of loan, the funds received are considered to be a tax-free. They are tax-free regardless of the way you will receive them, a lump sum or monthly payment.
Reverse mortgage requirements – are not the same as the requirements for traditional mortgages. Namely, For the purpose of applying for a reverse mortgage, you do not need to be worried too much about your credit score or income level. Because, you are not making any monthly payments, these are not considered.
Disadvantages of reverse mortgage loans
High fees – regardless of it characteristics, reverse mortgage is still a type of mortgage loan, thus it has certain fees which should be paid. Some of the fees, such as the origination fees, can be relatively higher with reverse mortgage. Because of the fact that the approval of reverse mortgage is not based on income level, it does present higher risks for the lender. This is the reason, why reverse mortgage fees might be higher. Keep in mind that the fees can be paid out of the reverse mortgage.
Interest rate – because of the risk involved for the lender, this type of mortgage bears much higher interest compared to some traditional mortgages. Although you put your equity as collateral for the loan, the amount you will end up taking is lower that the value of your equity. The amount of the funds taken is lower because of the different fees and higher interest rate charged by the lender.
Inheritance issue – with reverse mortgage loans you are receiving funds instead of making monthly payments. So, after your death, the mortgage would be paid off with the sale of your home. Meaning that your heirs will not get the house. Your heirs can get your home if they pay off the reverse mortgage. This might considered to be one of the main drawbacks of reverse mortgage. If you are planning to leave a legacy for your children, this type of mortgage is not adequate.
Moving out – although the pros with reverse mortgage was ownership of your home, it is correct as long as you stay in it. Meaning that you have some limitations if you decide to move elsewhere. Moving out of your home, can initiate the process of mortgage repayment (dying also initiate this process). Consequently, if you want to avoid making payments toward the lender, the home should be your primary residence. No living in your home for more than a year can be considered as if you have moved out.
Home related costs – all costs associated with your home, fall on you. Thus, you are obliged to make the necessary repairs, and keep your home in good condition. In addition, you are also liable for property taxes on your home, along with the obligation to pay insurance.
Complex loan type – one disadvantages can be the complexity of reverse mortgage. Although, this is disadvantages for some people, the fact remains that reverse mortgage loans might be difficult to understand.
You can often read that the mortgage loan would be one of your biggest decision you will make in your life. Because mortgage loan will have major impact on your financial health for many years to come. Therefore, it is highly important to make a wise and informed decision in relation to your mortgage.
While, with the other types of mortgage loans you have the obligation to make monthly payments, there is one mortgage with which you are receiving monthly payments. This mortgage is called reverse mortgage loan. Reverse mortgage loans can be pretty handy if you are faced with insufficient levels of income. You can supplement your monthly income with this form of mortgage.