A reverse mortgage is also known as a senior mortgage. It is a type of mortgage loan normally secured by an existing residential property, which allows the holder to access that property’s equity. These loans are normally marketed to elderly homeowners and are not required to have monthly repayment payments. The home is not required to be occupied during the life of the loan.
The applicant must be at least 62 years old and currently employed. The applicant must also own a primary residence. The applicant does not necessarily need to be living in this home to take advantage of a reverse mortgage; however, it is usually easier to qualify for a reverse mortgage on one’s primary residence. Some people may qualify for a reverse mortgage even if they own another property, but the odds are slim.
To qualify for a reverse mortgage, there must be two things to consider: age and income. If the applicant can still make their monthly mortgage payment, there is no longer an issue. The second factor, income, is more complex. The loan needs to be at least 2 percent of the house’s total cost, or else the lender will not provide financing. The heirs may also be able to receive the proceeds from the house’s sale, depending on the estate’s equity.
There are several options for homeowners. One option is a home equity conversion mortgage. This type of reverse mortgage requires borrowers to put their primary residence and rental properties that they currently own for collateral. The proceeds from the sale of these properties will pay off the principal on the reverse mortgage. The borrowers can choose to borrow only the amount needed for their current living expenses or borrow the entire amount needed. They do not have to pay interest while they pay off their loan.
Another option is a reverse mortgage co-signer. With a co-signer, other borrowers or family members can sign on as equity contributors. They can borrow against the equity in the homeowner’s home and contribute funds toward payments. The borrower will only pay interest on the funds they borrow. Because the borrowers are technically responsible for their reverse mortgage loan repayment, financial planners and lenders often recommend co-signers.
A reverse mortgage might also be obtained through a variable interest rate loan balance. This option requires that the homeowner agrees to a fixed rate, usually over the long term, in return for a lump sum of cash. This lump sum might be paid out to the borrowers periodically, or it might be a large amount.
If one or more of the heirs is unable to work and provide funds for the home equity loan, the lender will often allow another heir to take care of it. In this instance, the lender will allow the borrower to choose who will get the money among their heirs. Usually, the proceeds go to the younger son or daughter. However, if there is no income, the proceeds go to the heirs.
It should be noted that some reverse mortgage programs allow homeowners to make partial payments until they reach the age of 70. At that time, if they have not reached the end of their loan balance and equity, then they are retired. For many senior homeowners, a reverse mortgage could be an important way to supplement their retirement income. It can also be an important way to use home equity to build up capital for investments and home improvements.