Financial freedom during one’s golden years often requires more funds than expected. By using a reverse mortgage on a property you already own or property that has a low mortgage balance amount remaining, you access the opportunity to meet your financial obligations and still maintain your retirement plans.
What is a Reverse Mortgage?
The U.S. Department of Housing and Urban Development calls a reverse mortgage a loan that converts the equity in your property into cash. Essentially, the mortgage is a type of loan that helps with financial concerns or provides extra cash for seniors when they own a home or have already paid the majority of a home loan.
Although a reverse mortgage is a type of loan, it does not require repayment until you move out of the property or unless you do not meet the obligations stated in the loan agreement. If the homeowner passes away, then the loan is repaid by selling the property. Any remaining equity from the home sale goes to an appropriate heir or is passed down according to a will. If you move from the property, then you must repay the loan according to the terms of your agreement
Unlike a traditional mortgage, a reverse mortgage focuses on the needs of seniors. As a result, it has clear standards to determine when an individual qualifies for the loan.
- Applicants for the loan must be at least 62 years old or older before qualifying for the loan. If a husband and wife own property together, then both individuals must be at least 62 years old.
- The mortgage requires a majority of the equity in the property. If you still owe money on a previous home loan, then you must discuss your options with a lender before applying for a reverse mortgage.
- You must pay off a previous home loan before qualifying, but a small remaining balance also qualifies for the loan.
- The homeowner must live in the property, so a vacation home does not qualify for the loan.
- You are required to receive a mandatory but free discussion with a home equity counselor before you can be approved for a loan. A counselor provides essential information about the loan and helps you understand the terms and alternative options before you move forward with the process.
The amount of funds provided by a reverse mortgage depends on several factors, including:
- The age of the homeowner
- The current market value of the property. Some locations set a lending limit on the loan, even if your home’s value exceeds the limitation.
- The interest rates. Younger seniors usually receive fewer funds due to interest charges and the expected timeline before they are expected to repay the loan amount.
A reverse mortgage offers supplemental income, pays for unexpected expenses, health care expenses, pays off debts, and pays for home improvement jobs, but it only applies to specific groups and individuals. It is not an appropriate mortgage option for young homeowners or for individuals looking for supplemental income from a vacation property.