As you reach retirement, finding suitable sources of long-term income is potentially challenging. While many older adults rely on Social Security income and retirement plans, those aren’t always sufficient (or options) for some retirees. As a result, a reverse mortgage can seem like an excellent option for boosting retirement income.
However, many homeowners aren’t familiar with reverse mortgages. Here’s a look at what a reverse mortgage is, how it works, and more.
Reverse Mortgage Definition
In the simplest sense, a reverse mortgage is a loan that allows homeowners age 62 and older to tap the equity in their house and turn it into income. Many opt to get fixed monthly payments from the lender of the reverse mortgage. However, you can also receive a lump sum or use it as a line of credit, depending on the arrangement details.
How Does a Reverse Mortgage Work?
Reverse mortgages work differently than traditional mortgages in a couple of ways. First, payments are received by homeowners, and homeowners don’t owe payments to lenders. Instead, any balance accrued (including fees and interest) come due if the homeowner sells the property or passes away. As a result, payments aren’t necessarily required during the homeowner’s lifetime if they remain in the house until death.
Second, there are several payment options. Homeowners can get a fixed monthly payment until all of the home’s equity is tapped. Options for lump sums or using the account as a line of credit are also both potential options.
Finally, the homeowner maintains the title of their house. That doesn’t happen with traditional mortgages, as those cause the lender to become listed on the title.
However, there are some similarities between reverse mortgages and traditional home loans. For example, interest is accrued on the amount borrowed, and the interest rate is based on the terms of that specific reverse mortgage. Second, there are fees, the nature of which can vary depending on the payment structure.
What Happens to a Reverse Mortgage When You Pass?
When you have a reverse mortgage and pass away, the balance of your reverse mortgage becomes due. Your heirs will receive a due and payable notice from the lender. Once that’s received, they get 30 days to settle the debt.
Usually, heirs have a few options for settling the debt. They can provide cash that covers the amount owed if they want to keep the house. Alternatively, they can get a mortgage or a similar type of loan that pays off the reverse mortgage debt.
If your heirs don’t want to keep the house, they can sell it. Then, the proceeds from the sale pay off the reverse mortgage.
Why Do People Get Reverse Mortgages?
Typically, people get reverse mortgages to secure a source of income. It isn’t uncommon for a significant portion of a person’s net worth to be tied to their home’s value and equity. By using a reverse mortgage, using that equity to handle living expenses is an option.
Some also use reverse mortgages to update their home. Making the space more comfortable or accessible can ensure that aging in place is an option. As a result, the money makes remaining in the house for the remainder of the owner’s life more viable, which can provide a significant amount of comfort.
