Reverse mortgages can be a viable option when seniors are considering retirement. Retirement can become an expensive time with unexpected costs, or perhaps you want money to make the most of your senior years. You may be considering downsizing your home or you may want to choose the alternative to remain in your current home. At a time where your income will likely be lower, a reverse mortgage can offer a lifeline or give you more possibilities and options.

Perhaps a homeowner is wanting to stay in their home and do a little remodeling. There are many ways to boost home value while not breaking the bank. This may afford the homeowner to appreciate their home and enjoy living in it.

Let’s look at reverse mortgages and how they can benefit you.

The Reverse Mortgage

If you have paid off most or all of your mortgage, you can use the equity in your home as a source of income. This means that you can continue to reside in your home while taking an income from it. Keep in mind that this money will have to be paid back.

This type of loan is only open to people over the age of 62 years. Also, even though you don’t have to make payments on this loan, your lender will still charge interest on the amount you receive.

In the event of your death, the loan will have to be repaid by your heirs. The home can be surrendered to the lender, or the loan amount can be repaid in cash.

The loan can also be paid off when the home is sold providing there is enough equity in the home to pay it off. Your loan would have to be less than the value of the home for this option to work.

If this seems like a viable option for you, there are three types of loans to choose from. Consider the options very closely to determine whether or not this may be a solid solution.

Home Equity Conversion Mortgages

The Home Equity Conversion Mortgage or HECM is the most common of the three types available. The money from the loan can be used for any purpose and the program has the backing of the HUD.

Your financial situation will be assessed, along with the appraisal of your home and other factors such as your age, which will be used to determine how much money you can get from a reverse mortgage. Basically, the more equity, fewer liabilities your home has, and the older you are, the higher the loan possible.

HECM isn’t a good choice if you don’t need that much money or if you intend to move home in the not too distant future. As this is a HUD supported program, you will have access to an independent counselor to make sure this loan is the right choice for you.

Proprietary Reverse Mortgages

This type of loan is provided by private businesses to people with higher value equity available. It will let you get a higher loan and is offered to people with a home appraised at $680,000 or more.

This loan has the benefit of no upfront charges or monthly mortgage insurance to pay. You can expect to be charged a higher interest rate on this type of loan, however, since the lender will want to make up for the lack of mortgage insurance paid.

Single-Purpose

If you need money for a specific reason, the single-purpose mortgage may be a better option. They are often provided by non-profits or local government agencies, and as a consequence, the interest rates charged are much lower.

The downside of this mortgage loan is that it may be more difficult to get. There are fewer organizations offering it, and you may not have anything available in your area.

Receiving Reverse Mortgage Funds

You may be able to choose from up to 6 different payment methods to receive the money from a reverse mortgage.

Line of Credit: If you don’t need all of the money at once, you can draw on a line of credit when you need it. This reduces the amount of interest you have to pay as you will only be charged on the money lent and not the full amount.

Tenure: This offers continued regular payments for as long as you and an eligible spouse remain living in the home.

Modified Tenure: This is the same as the standard tenure payment, but also gives you a line of credit for any emergencies.

Term Payments: You could choose to receive payments over a set term, this will give you a fixed monthly income whether you remain in the home or not.

Lump-sum: You can have all of the money in a lump sum if you want. This is only offered for fixed-rate loans, however.

Modified Term: A line of credit will be available to you on top of your period of monthly payments.

The Benefits and Disadvantages of Reverse Mortgages

This type of loan product allows you to remain in your home when you have large expenses to pay. It means that you don’t need to find the money for loan repayments and you can still benefit from the increase in the value of your property. There are many pros and cons of a reverse mortgage.

The downsides to this type of lending include higher fees and interest than many other loan options. It will also reduce the equity in your home, and there are strict requirements to be approved.

Final Thoughts

If you find yourself lacking income in later years, this may be a viable option for a homeowner. Many seniors do want to remain in their current home so that they can age in place. However, before you agree to this type of loan you need to be fully aware of the costs and downsides involved. Be sure to consult multiple lenders in order to obtain the best terms.

About the Author

The above real estate article “Everything You Need to Know About Reverse Mortgages” was written by Sharon Paxson of Newport Beach Real Estate. With experience since 2005 representing clients with their real estate transactions, we welcome the opportunity to share our knowledge and expertise and guide you through the home selling or buying process.

If you are considering selling your home, we welcome the opportunity to work with you and list your home with a top Newport Beach CA Realtor.