What is a Reverse Mortgage?
A reverse mortgage is often misunderstood, but can offer a fantastic opportunity for homeowners over 62 years of age!
People often misunderstand what exactly the purpose of a reverse mortgage is. If you’ve found yourself in the group of people confused by their purpose, don’t worry! We’ve found the important things you need to know if you’re considering a reverse mortgage!
Reverse Mortgages are FHA Loans
This means that there is both an up-front mortgage insurance premium and monthly premiums to pay. Because of the up-front premiums, reverse mortgages are not necessarily appropriate for borrowers who intend to sell their homes in the near future. In addition, reverse mortgages can only be secured by a borrower’s primary residence. Reverse mortgages are now designed to used for both refinance and purchase transactions.
The Bank Doesn’t Own Your Home
A common thought about reverse mortgages is that the bank owns your home. This is not the case. The home secures the mortgage, just like with a forward mortgage. A reverse mortgage simply allows the home owner to live in their home and retain ownership without having to make monthly mortgage payments. There is another advantage as well; if the amount owed becomes becomes greater than the value of the home when the borrowers decides to sell, they are only required to pay 95 percent of the home’s value and the rest is forgiven. This is also true for the borrower’s heirs in the event that the borrower passes away. However, if the home is worth more than the balance owed in either situation, either the borrower or their heirs will be entitled to any remaining equity after the loan and other associated costs are paid in full.
A Reverse Mortgage can Improve Cash Flow
In fact, this is the whole point of a reverse mortgage. They improve cash flow in several ways. Most obviously, the borrower doesn’t need to continue making mortgage payments. Additionally, there are situations where the borrower has enough equity or also has a line of credit that can never be frozen and can grow over time. This gives borrowers the flexibility to use and repay the line of credit at their leisure, often avoiding having to sell other assets when making larger purchases.
There are Numerous Strategies to Consider
One of the best strategies is to take out a reverse mortgage early on and use the savings from not having to make. mortgage payment to pay down debt. Reverse mortgages can be set up to pay borrowers monthly installments. The payments can be used to postpone collecting Social Security benefits. Waiting until you are older to start collecting Social Security will substantially increase the amount a retiree will be entitled to collect.
You Do Still Have Home Costs
While reverse mortgages can do a lot to help with cash flow in your later years, it’s important to remember that real estate taxes and homeowners insurance still have to be paid. Instead of the mortgage company collecting these monthly, it becomes the responsibility to pay those directly upon closing on a new reverse mortgage. The amount doesn’t change, however.
Interested in learning more about reverse mortgages? Our friends at Mountain State Financial Group have all the information you need, and they can help you figure out what type of mortgage is right for your situation!