Have you heard the term “Reverse Mortgage”? Many people have but it’s still a mysterious concept that many people don’t understand. It’s really a pretty neat loan program and can be a very valuable tool under the right circumstances. Like any financial tool, this product is not right for everyone, but, with the right guidance and knowledge it makes sense for many.
A Reverse Mortgage is really exactly what it sounds like. In a “normal mortgage” the borrower gets a fixed amount of money upfront in exchange for making payments of principal and interest over a set period of time. Ultimately, the borrower either pays the loan in full by making monthly payments or the loan gets paid off when the house is sold. In a Reverse Mortgage the borrower gets a loan that they never make a monthly payment on, the interest accrues over time (is added to the loan balance) and the loan is not repaid until the borrower is deceased or moves out of the house.
Who is eligible for a Reverse Mortgage? The borrower has to be at least 62 years of age, occupies the home as their primary residence, has significant equity in the house or owns the home free and clear. The loan amount available is based on the value of the home and the age of the borrower. The older the borrower the more money they can borrow. The reason for this is that the loan will not grow as large over time if the life expectancy of the borrower is shorter therefore the loan balance can start out larger.
Why get a Reverse Mortgage? The main advantage to a reverse mortgage is the fact that you never have to make a mortgage payment again. In retirement people are typically living on a fixed income and not having to make a monthly mortgage payment can really add to the financial comfort of the retiree. If a person is getting a fixed income of $2,000 and has to make an $800 mortgage payment and they can eliminate the mortgage payment they now have an additional $800 a month to spend on other things! If you were living on only $1,200 a month and that amount was increased to $2,000 your quality of life would be a lot higher.
A Reverse Mortgage can actually provide a monthly income stream as well. Let’s say a person is 70 years old and owns a home worth $250,000 free and clear. With a Reverse Mortgage this borrower could get a monthly check in the amount of $905. Not only are they not making a monthly payment they are actually receiving a check from the mortgage company every month! They could also choose to get a lump sum at closing in the amount of $140,000 that they can do whatever they want with and never make a payment on the loan. If this borrower has an existing mortgage on the property of $75,000 they could payoff that loan and still get a monthly check in the amount of $420 and never make another house payment. There is also the possibility of using the proceeds of the loan as a line of credit – borrow as much as you want when you need it. Pretty cool eh?
What happens if the loan amount grows larger than my house is worth? The answer is that you cannot be forced out of the house for any reason and in the event that you are deceased your heirs do not have to pay any shortfall back to the lender. If, after your death, the house sells for more than you owe on the reverse mortgage then your heirs would get the difference.
Do I have to have good credit or income to qualify for the loan? No. Your credit standing and income are not taken into consideration. The only factors are your age, the value of the home and what you currently owe on the home.
Can I use a Reverse Mortgage to purchase a home? At this time our guidelines do not allow for the purchase of a home. However, if a person sold a home and was able to purchase a new home with cash they could then immediately refinance the home with a reverse mortgage and get a lump sum back, a line of credit or a monthly check.
The bottom line is that this is a way for retirees to maximize their cash flow or to allow a person to keep a home they might not otherwise be able to afford. It can really be a great tool for the right borrower but it’s very important to have a knowledgeable advisor and to fully understand what you are doing. If you know someone who might benefit from this type of loan have them get in touch with me and we can figure out if this is the right move for them.
Written by Ken Mascia
Prime Capital Mortgage, 248.644.1200
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