Are you thinking of taking out a Reverse Mortgage? It works well for seniors that already own their home and need a little cash flow. Rather than keeping the equity in your home for your beneficiaries, you can enjoy the money while you are still alive. Since you don’t need to make payments on the loan while you are still in the home/alive, how does the principal ever get paid back?.
The Reverse Mortgage Rules
Typically, you pay a reverse mortgage’s principal when you move or your inherit ants pay it when you pass away. These are the most common reasons for principal repayment. However, there are strict rules regarding the use of the Reverse Mortgage.
You may only take out a Reverse Mortgage on a home that you use as your primary residence. If you are trying to ‘age in place,’ it’s a great program. If you move out of the home, though, but don’t sell it, you will have to pay the full balance of the Reverse Mortgage back.
You will also be in this situation if you don’t keep up with your insurance, real estate taxes, or home maintenance. As a part of the qualification process, you must prove to the lender that you can comfortably afford the insurance, taxes, and upkeep of the home. If the bank discovers you are not keeping up, they will add the cost of any missed payments to your loan, and they could demand repayment of the Reverse Mortgage.
Disbursing the Reverse Mortgage
Just how much you owe on your Reverse Mortgage depends on how you take the funds. You have three options:
- Lump sum – If you want all of the money now and will keep it in your own savings account or investment, you can do so. You will then start accumulating interest on the full balance from the start. Each month that your loan is outstanding, interest accrues, increasing the amount you owe at the end.
- Monthly payments – You can designate a specific monthly payment that you would like to receive. If you know how much money you need to live your desired lifestyle, you may want to choose this option. This can help you stay within a specified budget and can decrease the amount of interest you owe since it will likely take many years for you to take out a large portion of the home’s equity.
- Line of credit – You can also have the funds in a line of credit, ready for you to draw as you need them. This method also delays the amount of interest you pay as you will only owe interest on the funds you actually withdraw from the line.
Qualifying for the Reverse Mortgage
Qualifying for the Reverse Mortgage is easy. First, you must be at least 62-years old. If you are married, the youngest spouse must be at least 62-years old in order for you to apply for the program.
You must also own the home free and clear. In some instances, if you have just a small balance on your mortgage, you may get approved. The lender will use the proceeds of the Reverse Mortgage to pay off your existing loan, though. This will decrease the amount of funds available for you.
Finally, you must prove that you can afford the home’s real estate taxes, homeowner’s insurance, and upkeep. Lenders generally calculate 1% of the home’s value for annual upkeep. If you can prove that you can afford these costs, you may be able to tap into your home’s equity, taking as much as 80% of the home’s value in a Reverse Mortgage.
A Reverse Mortgage can help you get ahead during your retirement years. Just keep in mind that you will need to pay the balance off in full if you leave the home, such as to move to a nursing home. You can’t just will the home to a family member and let them live off the funds too. As soon as you don’t live in the home as your primary residence, the loan can become due and payable.