Retirement is something many would like to be prepared for ahead of time. However, rising cost of living and healthcare expenses can leave seniors short on funds. The good thing is, senior homeowners have reverse mortgages as an option to supplement their retirement fund.
Homeowners aged 62 years old and above are allowed to have this kind of loan. This loan may be used to supplement their retirement funds. Retirees remain to be the owner of the house, and so they still need to continue to pay for their insurance, property taxes, and maintenance costs.
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So, how does a reverse mortgage work?
A reverse mortgage works by utilizing a portion of one's home equity to pay off the mortgage balance, if any. The homeowner does have the option of not making monthly payments. The loan balance does not come due unless the owner moves out, does not pay taxes or insurance, doesn't maintain the home, or passes away.
However, by not making monthly payments, the monthly interest on the loan gets added to the total balance of the loan. Once the existing mortgage is paid off, the reverse mortgage lender will pay any remaining loan proceeds.
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Types of reverse mortgage
There are three types of the reverse mortgage loan: proprietary reverse mortgages, single-purpose mortgages, and home equity conversion mortgages . The most common and popular is the Home Equity Conversion Mortgage (HECM). This is the only available and federally insured reverse mortgage loan.
The two types of HECM loan options are the adjustable-rate and fixed-rate loan. An adjustable rate loan's interest rate increases or decreases throughout the life of your loan. And it provides many options on how to receive the proceeds.
Meanwhile, fixed-rate loan's interest rate offers only one option and the rate will remain the same throughout the life of the loan.
Benefits and disadvantages of reverse mortgage
First, it can be used to make home improvements or pay for in-home care services. You can free up more money monthly. It also eliminates the need to pay your mortgage payment each month while still being the owner of the home.
However, keep in mind that you will decrease the equity and increase the amount of debt since it is essentially borrowing against your home equity. Paying the property taxes and homeowners insurance is a must. The loan balance will increase as well as the interest if you will not make payments. Also, there are high closing fees and costs associated with this loan.
How to qualify for a reverse mortgage
For you to be eligible for a reverse mortgage, you must be 65 years or older. You also must own a paid-off home or at least have significantly paid-down your existing mortgage loan. The property should also be your primary residence.
Make sure as well that you have no federal debts. And that you have regular cash flow to pay your property taxes, insurance, maintenance, HOA fees, and other expenses.
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