Question by Aubrey: How does a reverse mortgage work?
How does a homeowner benefit from a reverse mortgage?
Does he get paid every month more than he’s currently paying on his mortgage (giving him extra cash per month)?
Does the lender bet on the house appreciating after the borrower dies?
Why would anybody want to pay or buy a house from a person who still lives in there (which they cannot utilize until this person dies)?
Is reverse mortgage designed for people who have nobody to give their houses to when they die?
What do you think? Answer below!
This is a home equity loan for people who are age 62 and over. They’re able to access part of the equity in their homes without making a payment for as long as they remain in the home. They remain the owners (the lender isn’t buying their house, hence the word “mortgage”), they can sell it anytime, and their heirs will still inherit the house. The heirs have the same options that people inheriting a house with any mortgage have: Pay it off, Sell the house and pay it off (additional proceeds belong to the heirs), Refinance (assuming you can qualify for a loan).
There are no requirements for income, credit score, debt ratio, assets, employment verification…none of that stuff matters. Instead the qualifications are that all owners are 62 or older, the house is an eligible type (single family, 2 – 4 family when the owner occupies one unit, some condos and manfactured homes that meet FHA requirements), but not mobile homes on rented land or co-ops.
We can lend you a percentage of the value of your home. Out of that amount we need to be able to pay off any loans, mortgages, lines of credit, anything that creates a lien or uses the house as collateral. You may get cash from us depending on the value of your home and how much you owe. Your benefit may be that you don’t have a mortgage payment anymore. Some people don’t have enough equity to do it at all.
Interest accrues into the principal balance, although if you want to pay the interest (or any amount) at any time you can, so the balance is larger when you’re finished with the loan. When you or your heirs sell the home, you pay back either the loan amount or the selling price, whichever is lower. If you or your heirs refinance into a traditional loan, then you pay the total amount due.
There are several things that are frequently misunderstood. The lender is NOT buying your house. You CANNOT outlive a reverse mortgage. Your heirs will never owe more than the value of the house at the time of sale, and never anything out of their own pockets. You only inherit a house; you can’t inherit a mortgage. The purpose of this loan is to help people stay in their homes. If I needed a reverse mortgage to put food on the table, I wouldn’t worry about leaving anything to my kids.
How does a reverse mortgage work? It works very much like a regular traditional loan. The 3 main differences are that:
1) you don’t have to qualify based on income or credit history (just age, over 62)
2) it is open ended for as long as you live there
3) you do not have to make monthly mortgage payments (negative amortization loan)
How does a homeowner benefit from a reverse mortgage? Some of the benefits are:
heirs will still inherit the home
1) senior does not have to qualify in terms of income, FICO score, credit history, employment, previous bankruptcies, high credit card debt.
2) it is open ended; no fixed term; loan only comes due when it is no longer their primary residence
3) he still owns the home and can sell it or pay off the loan any time
4) there is no prepayment penalty
5) there are competitive fixed and adjustable rates
6) it is a non recourse loan, so neither they nor their heirs are personally liable for the home
7) they can use the program to buy a home, i.e. downsize, relocate
9) they can do whatever they want with the funds (legal)
10) for those who keep the funds in a Line of Credit, the funds grow over time
11) funds are not taxable
12) it does not affect social security / VA (nor SSI, as long as they work within the guidelines)
13) depending on the program they choose, they can get a guaranteed income every month for as long as they live in the home (works somewhat like an annuity)
14) there is a Saver program for those who don’t need as much and want to keep the costs down
15) costs are typical of any FHA loan
Does he get paid every month more than he’s currently paying on his mortgage (giving him extra cash per month)? It depends on their needs, what they choose to withdraw – whether it is a regular monthly draw or whether it is a fixed amount each time. The program is very flexible. Once you get a reverse mortgage, you no longer have to make monthly mortgage payments – that is what a reverse mortgage is all about. But for some folks, just paying off an existing mortgage is all they need; keeping that payment in their pocket each month is more than enough for them to balance their budget and live comfortably. For others who need more money on a regular basis, they have monthly draws set up for the rest of their lives in their home, or for a fixed term. Or they just keep it reserved in a Line of Credit that grows every month, knowing they can make withdrawals whenever they need it.
Does the lender bet on the house appreciating after the borrower dies? Yes, that is why they never give you all of your equity up front and go up to 100% loan to value like a regular loan. Typically you get anywhere from 50-80% depending on your age. The older you are the more money you get because they gamble on your life expectancy. They can afford to give you more of your equity the older you are knowing that the probability is that they will get paid sooner. Since this is a negative amortization loan (each month that you choose not to make a monthly mortage payment, the loan balance increases), the intention is not for you to become upside down (owe more than the house is worth) and leave nothing to the heirs – but it is a possibility, especially in a decreasing housing market.
Why would anybody want to pay or buy a house from a person who still lives in there (which they cannot utilize until this person dies)? Because they have analyzed their risks on potential compounded earnings versus the fact that the loan is open ended (doesn’t become due until the senior moves away permanently), and they feel that for the majority of the time, the potential upside leans on their side. Also, since FHA insures all the loans, the lenders are guaranteed that they will be made whole regardless, as long as they bide their time. But they only get paid the compounded interest earned over time as specified in the loan; they don’t get title and any remaining equity goes to the estate.
Is reverse mortgage designed for people who have nobody to give their houses to when they die? No, that is not the focus, but obviously it affects less people if the senior has no family. It is designed for people on a fixed income (retired folks) with rising and unexpected monthly expenses and longer lifespans. But “rich” people also do reverse mortgages and use it as a wealth building tool, for estate and tax planning, and some use it as part of their charity planning – even if they have children or heirs.
1) You can only get a reverse mortgage when you have no mortgage on your property.
2) Yes, the lender bets that the value of the house when he gets it is greater than the debt. But this is why the max. amount of the reverse mortgage is only 60% of the initial value of the house. he is also betting on when the owner dies.
3) They do not buy it, it is just secured lending. And only financial companies make these loans.
4) They are designed for people who need cash now. Whether or not they have any relatives is not relevant.
if the person still has a mortgage it is very hard to get reverse m. it is designed for elderly whom own their homes outright. the company buys your home on a payment plan and receive the home upon their death. person can live in it till death.
problems with these are person receives no interest . also most have to move into nursing homes and then lose their homes.
if house then sold or after death little is left over for heirs. only consider these plans if no other option
and no heirs . you may only receive 5 to 8 years of payment then lose all
Just know that a reverse mortgage is considered by everyone to be one of the worst financial mistakes a retired person can make in his or her lifetime.
You are essentially giving your house to a bank for about 60% of the equity, just so you can get a monthly check.
When you die, the bank keeps the house.
Always it is a better idea for an older person to sell the darn house, take the equity, and rent or buy a small condo or apartment that they can easily afford.