What is the reverse mortgage?
Although many mortgage options are now offered to prospective homebuyers, one that has received a lot of attention is the reverse mortgage. The United States Department of Housing and Urban Development, also known as HUD, is currently being inundated with questions with a large number of people asking “what is a reverse mortgage?”
In response to “what is a reverse mortgage”, it is actually a type of private loan but one that is insured by the federal government. What makes a reverse mortgage unique is that a portion of the home’s equity is converted into cash, which can then be used by the homeowner in any way they see fit. Because of the qualifications and restrictions associated with a reverse mortgage, seniors often use it as a means of financial security.
With this particular type of mortgage, it is not necessary to validate the owner’s income for the approval process. However, to establish the loan amount, interest rate, and monthly payments, several factors are considered. For example, a person asking “what is a reverse mortgage” should know that the minimum age requirement is 62 years. In addition, the owner must own and live in the home and complete a HUD-mandated counseling session.
Another important piece of information that accompanies the question “what is a reverse mortgage” is that the owner can choose how the funds are distributed. For example, the money may come to the homeowner as a monthly payment, a lump sum, a specific line of credit, or any combination of the three. The most important piece of information is that the mortgage on the home is not paid off until the owner dies, moves, or sells the residence.
Along with the question of what is a reverse mortgage, interested parties need to understand the associated advantages and disadvantages. Some people see a reverse mortgage as a blessing, while others see it as a potential risk. The best advice is to learn as much as you can so that any decision is an informed one.
Advantage
One of the main benefits associated with a reverse mortgage is that the owner can use the equity in the home for many things. For example, the money could be used to travel, upgrade the house and pay medical bills, send a grandchild to college, etc. However, in trying to manage bills over the past few years, many homeowners use reverse mortgage funds to supplement a retirement account, savings, or Social Security income.
Another advantage of a reverse mortgage is that all the money withdrawn against the principal is completely tax-free and there are no restrictions on income. This means that if the homeowner is only bringing in a small amount of money each month to live on, or if he has no income at all, he would still qualify to use the principal money.
With no income verification and no monthly payments until you die, move or sell, the reverse mortgage is beneficial to many. For the elderly homeowner, a mortgage like this allows them to continue a certain lifestyle without feeling overwhelmed. People who have worked long and hard all their lives can use reverse mortgage funds to relax and enjoy life.
Finally, if the owner were to pass away, any heir would have the legal option to refinance the loan to a more traditional loan. However, there are variations of the reverse mortgage, so inheritance issues are important to the homeowner, and these options should be carefully reviewed and analyzed.
Disadvantages
The other side of the “what is reverse mortgage” question, you need to understand that along with the pros, there are also some cons. One is that the interest rate attached to the loan is variable. This means that the payment would be more expensive than that of a traditional type of refinance mortgage and that in the event of death; any member of the family would likely have little or no capital to inherit. Of course, any other savings, pensions, or assets left in the hands of loved ones would not be affected at all by the reverse mortgage.
Unlike more traditional mortgages, a reverse mortgage is generally expensive to obtain. Some of the related costs include application fees, insurance, closing costs, appraisal and, in some cases, a monthly lender-managed loan fee. This, in addition to the continuation of other housing fees such as insurance, taxes, repairs, homeowners association, etc., should also be considered.
Then, when discussing “what is a reverse mortgage” and the potential drawbacks, keep in mind that the condition of the home would also be a factor the lender would consider. For the loan process to be finalized, the home must be considered structurally sound and in good condition. However, if problems are identified, repairs necessary to bring the home up to standards will most often be added to the reverse mortgage loan.
As you can see, there is a lot of information that follows the “what is a reverse mortgage” question. Learning as much as you can puts you in a position to make the best decision for you.