We having been hearing a lot about reverse mortgages in recent years, but in spite of that, there’s still a great deal of confusion surrounding them. In simplest terms, a reverse mortgage is a type of home equity loan for homeowners 62 years old or older that does not require monthly payments. Once considered a kind of last-resort source of income, reverse mortgages have now entered the main stream and is now being utilized by older homeowners. For those who are still a little fuzzy on how it’s utilized, let’s take a closer look, at what exactly a reverse mortgage is and how it can help Long Island homeowners.
What Is a Reverse Mortgage?
As mentioned, a reverse mortgage is a specialized kind of home equity loan available to homeowners 62 years old or older. Homeowners with substantial equity in the home can borrow against it to get money in a lump sum, in monthly payments, or in a line of credit. However, unlike a conventional “forward” mortgage, a reverse mortgage doesn’t require the borrower/homeowner to make loan payments.
The homeowner still needs to have the appropriate credit score and must maintain the home as a primary residence.
As per federal regulations a reversed mortgage cannot be structured to exceed the value of the house and the loan becomes payable in full when the borrow dies or sells the house. That way, the borrower’s estate won’t have to make up any difference even if the home’s value decreases due to market fluctuations.
Older people who find that most of their networth is tied up in the value of their house get a reverse mortgage to get needed cash for living expenses, home upkeep, and medical bills. Reverse mortgages can help Long Island homeowners, but require careful consideration because they can be both costly and complex and are subject to scams.
How It Works
“HUD – which, through the FHA, administers/insures the majority of reverse mortgages – has calculated a table of “multipliers,” based on your age and prevailing interest rate levels. This multiplier is essentially a ratio of your home equity that HUD has determined you are eligible to borrow at the time you obtain your reverse mortgage. Basically, take the value of your home, multiply it by this ratio, and voila, you have determined the maximum amount (prior to fees and other adjustments) that you can borrow under current market conditions. For example, if you are 65 years old and your lender has quoted you an interest rate of 5.5%, and your home is valued at $300,000, then you can borrow a maximum amount of $175,200 (based on a multiplier of .584) before fees. (Reversemortgage.net)
With a reverse mortgage, you don’t make payments to the lender – the lender makes payments to you. You get to choose how you will receive the payments, and interest is rolled into the loan balance so that it’s not an unexpected expense. You also keep the title to your home, but over the life of the loan, your debt increases, and the equity decreases.
Your home’s equity is, of course, the collateral that secures the loan. You as the borrower never have to repay the loan because nothing comes due till you die or sell the house. When either of these two happens, your home will be sold, and the proceeds will go directly to the lender to pay off the principal, interest, insurance, and fees. If one or more of the heirs chooses and is able, they can pay off the mortgage so that they can keep the home.
How a Reverse Mortgage Can Help Long Island Homeowners
A reverse mortgage can help Long Island homeowners in several ways, including providing:
- A way to access home equity without having to sell the home
- Those who can’t qualify for a home equity loan a way to access their home equity
- A way to have a large lump sum of cash or line of credit when needed
- A loan that requires no monthly payments
- A method to keep up cash flow when all your assets are tied up in your home
- Non-taxable income because the IRS considers a reverse mortgage a loan advance
But Consider Carefully . . .
Despite these many obvious benefits of a reverse mortgage, there are definite pitfalls and drawbacks that you must take into account before making a final decision. You will, for example, spend a large part of your accumulated home equity on interest and loan fees. And you will most likely not be able to pass your home on to your heirs. If a reverse mortgage provides only a short-term solution to your financial problems, it may not be the best solution for you. You should, then, consult with both financial and real estate professionals to determine whether a reverse mortgage is right for you as a Long Island homeowner.
To find out if a reverse mortgage can be beneficial to you in your current financial situation, contact me today! (631) 357-4819