Even though reverse mortgages have become quite popular over the past couple of years, they still account for only 1 per cent of the $11.5 trillion in U.S. mortgages. Furthermore, as per the reports from the U.S. Census Bureau, only 3% of Americans have a reverse mortgage. If you are someone who is contemplating retirement and unsure if you’ll have enough money to bank upon, reverse mortgages are just the right solution to provide you with the financial freedom you desire. In this post, we shall discuss all there is to know about reverse mortgages for senior citizens.
What is Reverse Mortgage?
In a nutshell, reverse mortgages are loans that can be availed by senior citizens over the age of 62 by allowing them to borrow against the value of their home. Unlike a traditional mortgage which requires you to make monthly payments against the loan, in the case of a reverse mortgage, the entire loan balance becomes due and is to be paid when the borrower dies, permanently sells the home or moves away. Additionally, the mortgage is structured in such a way so that the amount to be paid as the loan does not exceed the value of the property over the term of the loan.
How does a Reverse Mortgage Work?
Homeowners aged 62 or older can convert part of their equity in their property into cash. Instead of the homeowner making payments to the lender, the lender makes payment to the homeowner, almost like a role reversal. The borrower can decide how he or she wants to receive the payments and only has to pay the interest on the proceeds received. Over the term of the loan, the debt of the borrower increases while the home equity decreases. But all throughout this duration, the title of the home stays with the homeowner alone.
What are the Types of Reverse Mortgages?
Reverse Mortgages are broadly categorized into two types – public sector and private sector loans.
• Public Sector Loans: These loans are offered by the government and are generally to be used for a specific purpose, say, for example – home repair.
– Single Purpose Reverse Mortgage: Such loans are offered to low-income earners who are in need of funds for a specific purpose.
– Home Equity Conversion Mortgage (HECM): Suitable for properties below $400,000, these loans are guaranteed through the Housing and Urban Development (HUD) and are not need-specific.
• Private Sector Loans: Such loans are issued by banks and mortgage companies, basically all non-governmental agencies get covered in this sector. Taking a reverse mortgage loan from a private sector can be a little more expensive when compared with public sector loans.
How Much Do I Qualify For?
The loan amount varies and depends on the appraised value of the property and the age of the youngest spouse. Generally, the Loan to Value (LTV) can be anywhere between 50% and 70% of the value of the property.
Once you comprehend its potential, Reverse Mortgages can be a very smart and effective way to access funds for your retirement and manage other major expenses.