If you are 62 years of age or older and are looking to reduce your monthly payments, while being able to gain access to additional funds, a reverse mortgage may be a great option for you.
In the past reverse mortgages have had a bad reputation. The truth is that it’s very similar to a traditional mortgage, but the way in which the money is paid out is a little different. With a reverse mortgage, you are leveraging the home’s equity, allowing this money to pay medical expenses, finance home improvements, or even subsidize your monthly income. The amount you can get from a reverse mortgage depends largely on your age and the equity you have in your home. As the bank pays out the reverse mortgage to you, the interest on that principal grows.
How Is a Reverse Mortgage Paid Back?
A reverse mortgage may not have a set maturity date or the date a loan must be repaid in full. The standards are set in the loan and may define maturity as the date that:
- The borrower dies.
- The borrower sells the property.
- The borrower moves out of the home.
- The borrower fails to provide reasonable upkeep or pay property taxes.
Once you or your heirs sell the home, the lender has first right to the proceeds to recoup any outstanding balance on the reverse mortgage (unless there is also a lien on the home for unpaid property taxes). If the outstanding loan amount is less than the sale price, you or your next-of-kin will receive the difference.
Are There Limits on Selling a Home with a Reverse Mortgage?
The maturity date of a reverse mortgage is most often when you sell your home. So the sale of your home is the most common part of the reverse mortgage process. With a traditional mortgage, you expect your home’s value to exceed the remaining balance of the mortgage at resale. But because with a reverse mortgage is typically paid in installments, the mortgage principal increases rather than decreases. That makes it quite possible that the loan amount could eventually exceed the resale value of your home. Therefore, when selling your home that has a reverse mortgage, it is important to find a Realtor who is knowledgeable in the reverse mortgage process. An experienced Realtor will focus on factors that are significant and that can impact the home value the most for a reverse mortgage sale.
What If the Home Has Lost Value?
If the value of your home has fallen below the amount you borrowed on a reverse mortgage, you or your heirs may need to conduct a Short Sale. While the lender will buy into a Short Sale, they may require an appraisal to confirm the value prior to agreeing to the listing. Fortunately, reverse mortgages are known as “nonrecourse loans,” which means the lender cannot go after you or your heirs for the difference between the outstanding loan amount and the final sale price of the home.
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