What are Reverse Mortgage Loans And How Do They Work?
A Reverse Mortgage is a loan that homeowners 62 years and older can take advantage of if they have a considerable amount of equity in their home. The reverse mortgage allows them to borrow against the value of their home and receive the funds as a lump sum, fixed monthly payment or line of credit.
Brief Background
The pros and cons of a reverse mortgage have often been discussed, ever since it was first was created back in 1961 by the Deering Savings and Loan company in Portland, Maine, to help the widow of a football coach stay in her home.
However, since that day more than 50 years ago, the reverse mortgage has evolved to become a valuable financial tool. In recent decades, many new laws have been created to provide extra protection for homeowners, and homeowners are now taking advantage of its benefits. In fact, from 2018 and on, more than 33,000 reverse mortgages a year have been originated, (statistic provided by the Home Mortgage Disclosure Act)—and those numbers continue to grow.
The Truth About Reverse Mortgages
Reverse mortgages have come a long way, providing homeowners with more peace of mind when it comes to helping them financially in their senior years. Yet, many are missing out on its benefits due to several misconceptions about reverse mortgages.
As California home mortgage experts with over 50 years combined experience, our goal to provide valuable information to help homeowners considering this loan, and to shed some light on when this loan might be beneficial.
While this loan is not the best solution for all seniors, it is a loan that has helped millions of retirees live and age at home by using the equity in their homes. Reverse Mortgages can help augment the quality of life for many senior homeowners by providing a valuable financial tool.
Helps Seniors Can Stay Financially Independent from their Adult Children
For some senior homeowners that do not want to be a burden on their adult children, this loan taps into their home equity for improved cash flow without calling on their children for financial support. Reverse mortgage proceeds can be used for any purpose — medical expenses, in-home care, taxes and insurance, home maintenance/improvements, travel, investments, a home purchase, or any other need.
Many of the “sandwich generation” that we have spoken with find that the reverse mortgage helps Mom and Dad live comfortably without the added financial burden on them. For those that have kids in college and their own living expenses to manage, knowing that the reverse mortgage removes the added financial demands of aging parents is a huge relief.
Why is it called a reverse mortgage?
As the simplest explanation, a Reverse Mortgage is called “reverse” because unlike a “forward” or “regular” mortgage, the interest that is owed to the lender is not required to be paid back each month, and instead the interest is added to the outstanding principal balance owed each month, thus called a “reverse mortgage”.
Reverse mortgages are highly regulated, and there have been many criteria added over the years to help protect homeowners. The terms and amount borrowers can take from the equity in their home is based on the homeowners’ ages (all borrowing homeowners must be age 62 plus), the value of their home (a full appraisal is completed to determine this), the outstanding mortgage currently owed on their home (if any), and the loan program type chosen. These limits to the amount of the equity accessible ensures that the homeowner can safely use this loan for many years.
There are several ways that proceeds from a reverse mortgage can be taken/used. You can take a lump sum at the close of escrow, you can take a portion of the available funds and leave the remainder as an equity line of credit, or you can take it as a tenured payment (like an annuity, where you receive a set amount each month). Or you can take a combination of these. We will go over all available loan options with the homeowners during the application process.
Homeowner Responsibilities with a Reverse Mortgage
The main responsibilities of the homeowner/borrowers is to maintain the home, pay the property taxes and homeowners’ insurance, and keep it as their primary residence. The payments are deferred on the loan until the homeowner dies, sells the house, or moves out of the house.
Even before the Reverse Mortgage can be approved, the homeowners must complete counseling with a HUD-approved counselor. This is to help ensure that the homeowner understands how the loan works, their total financial/budgetary needs are, and if this loan is the best solution to help with their finances. This is another safeguard to help the homeowner make a better-informed decision about this loan.
Learn More About Reverse Mortgages in California
Each month, we will discuss another topic about the reverse mortgage, the way it works, and the pros/cons for the senior homeowner. Hopefully, we will answer all the questions you might have about this type of financing. You can also contact us directly with questions, and for us to provide loan options and numbers for you.
