Reverse mortgages are becoming more and more popular. Many people choose to go this route to help supplement their retirement savings. This article will go over the basics of reverse mortgages to help you decide if it’s an excellent financial vehicle for you.
What is a Reverse Mortgage?
A reverse mortgage is a particular type of home loan for homeowners who are 62 years or older. It’s a way for homeowners to turn their home equity into cold, hard cash they can spend. The government refers to reverse mortgages as a Home Equity Conversion Mortgage, or HECM for short.
How a Reverse Mortgage Actually Works
With a traditional mortgage, you borrow money from a lender to buy a home, right? Every month you pay the lender a specific amount based on your rate and the loan’s original amount. As you pay off the loan over time, the amount you owe to your lender decreases. The reverse mortgage is… well, the opposite. So at the beginning of a reverse mortgage, you owe $0, like at the end of a traditional mortgage, you owe $0. When you take out a reverse mortgage, you’re borrowing money against the equity you’ve built up in your home. The bank generally will give you one of three options to get the money.
- A line of credit
- A monthly payout
- A lump sum
Either way, the point is that instead of you giving money to the lender every month, the lender is giving you money. Why? Because you’re borrowing against the equity of your home. They know you’re suitable for it because you have equity in the home. Eventually, you will have to pay them back. This is often done by selling the home to get the cash necessary to pay the bank back.
Who Uses Reverse Mortgages?
As noted at the beginning, you need to be at least 62 years old to qualify for a reverse mortgage. So that should give a clue as to who uses this type of financial vehicle. Retired citizens typically have low incomes. As a result, they rely on pensions, social security, and retirement savings to pay their living expenses. Sometimes those things are enough, but many people need a bit more. That’s where reverse mortgages come into play. It gives the senior citizen a way to get usable money from their home without selling it. Because most older adults want to stay in place when they retire, the reverse mortgage is generally an attractive option for them. They get to stay in place and get access to the equity they’ve built up in the home. So that’s a good scenario for many people. That said, keep in mind that no program is perfect. There are costs involved with a reverse mortgage, including lender fees, closing costs, and FHA insurance charges. Another downside is that a reverse mortgage can get messy. The homeowner should stay a resident when they have a reverse mortgage. But if they go to a nursing home… are they still a resident? Or what happens if the borrower gets married after taking out a reverse mortgage, then they pass away while the reverse mortgage is still in place? The point is that there are both pros and cons to weigh.
If you’re over 62 – or your loved one is – and want to know more about reverse mortgages, call us at 702.850.2000. You can also send us an email at info(at)rcghomeloans(dotted)com. Either way, we’d love to walk you through your options so you can make the best decision for you and your loved ones.