As you age, you may be trying to figure out how you are going to pay all the unexpected bills that may accrue. For those who own their home, a reverse mortgage is an option. This guide will help you understand what this type of loan is, how it works, and the steps you need to take to procure one of your own.
What Is a Reverse Mortgage?
This loan is not new. Previously called Home Equity Conversion or HECM, it allows you to access the equity that your home has without requiring the monthly payments of a traditional line of credit. The Federal Housing Authority (FHA) and the Department of Housing and Urban Development (HUD) back these contracts. The proceeds from this disbursement are tax-free.
How Does It Work?
Your home is an asset, and it holds equity that you can tap. Traditionally, to get these funds you would have to do one of two things: take out a home equity loan or sell your house. Either method would get you cash, but would require a repayment of credit each month or the sale of your home.
A reverse mortgage is different. It taps the value of your home and lets you use it for whatever you need. You can get it in monthly installments to help fund your retirement, or you can ask for it as a lump sum. The money is yours, and there are no bank restrictions on how you have to use it.
As long as you stay in your home, you do not have to repay the principle. There are no monthly payments to detract from your budget. If you decide to move, or you pass, the money from the sale of the property is then used to pay back the loan. If you sell your home for greater than the payoff amount, you or your heirs get to keep the extra.
Contrary to popular belief, HECMs are not just for poor and desperate seniors. In actuality, it is often used as a strategic financial tool that will help manage retirement risks or act as supplemental income. You should determine your specific need before continuing the process.
You do have to keep up with the taxes and insurance on the property. Failure to pay these can result in the bank calling the loan and forcing you to sell. The home must also be kept in good repair.
How Do You Get a Reverse Mortgage?
To qualify, you must own your home, be at least 62 years old, and live in the house as your primary residence. Of course, some items will affect the amount for which you qualify. The value of your home based on an independent appraiser, your age, and any balance or liens on the property will determine how much equity is available. The interest rate for the transaction will also affect the bottom line. The better your credit the lower your interest rate will be, however, it is not considered as a qualifier.
Before you can apply, you must educate yourself and complete HUD counseling. Once the counseling is completed, send one of your certificate copies to the lending institution of your choice to start the application, after which the bank will process your paperwork and send it to an underwriter for final approval. Once the underwriting company has approved it, you will be contacted to sign the final documents, and the funds will be disbursed.