Reverse Mortgages: The New Loan
What is a reversible mortgage? Reverse mortgages are a loan against your
house that you don't have to pay off for as long as you're still living
there. Having a reverse mortgage can help you turn the value of your
property into cash without needing to move or to pay back the mortgage loan
every month. The payment you receive from a reverse mortgage should be
be distributed back to you in one of several ways:
- a single lump sum of cash
- regular monthly payments
- you can use the account as a credit line, this
allows you to determine when and how often your money is
paid to you; or
- you could combine any of the above payment methods
No matter how this mortgage loan is paid out, you won't usually have to
pay anything back until you sell, die or permanently move out of your house.
In order to qualify for virtually all reverse mortgages, you'll need to:
- own your home and
- be 62 years of age or older
When qualifying for most mortgage loans, the lender determines your gross
income in order to see just how much you can afford to pay each month, but
with reverse mortgages there's no need to make monthly repayments. For
this reason alone there's no minimum amount of income required to qualify,
so having zero income does not by itself disqualify you from receiving a
reverse mortgage.
With many mortgage loans, you can lose your home if you
neglect to make the monthly payments. However with a
reverse mortgage, there are no monthly repayments to make,
so it's impossible to lose the home by not making them.
Nearly all reverse mortgages need no repayment from you — or
other co-owner(s) as long as any of you reside in the home.
So as you can see they differ from other "normal" mortgage loans in these
critical ways:
- income is not needed in order to qualify for reverse
mortgages.
- monthly payments on a reverse mortgage are actually
made to you instead of you making payments to the
lender.
"Forward" Mortgages
By comparing the reverse mortgage to a forward mortgage, the kind you use
to purchase property, you can get a feel for how each works. Both
mortgage programs produce debt against a property and both impact how much
equity you will end up with in your home at the end, although both programs
do this in completely different ways. Your mortgage debt equals the
amount of money you owe a lender (typically). The total appraised
value of the home minus any debt held equals your equity. For example,
if your property is appraised at $200,000 and you still owe $125,000 on your
mortgage, your homes equity would be $75,000.
Decreasing Debt, Increasing Equity
When you bought your home, you likely made a down payment and borrowed
the rest of the money. You would then have had to pay back the
traditional forward mortgage loan every month over ten, twenty or even
thirty years. During this period one would expect that:
- your debt was reduced; and
- your homes equity was increased
As you continued to make each payment over the years, the amount you owed
(your debt or loan balance) was reduced, but your equity grew larger.
Once you make the last scheduled payment your loan balance will be at zero
and your debt would also be at zero, and your homes equity would then equal
the appraised value of the property.
Increasing Debt, Decreasing Equity
Reverse mortgages have the different function than forward mortgages do.
With a forward mortgage, you will need to use your income to repay the debt,
and this builds equity in your house. But with a reverse mortgage, you
are pulling the equity out in cash. So with reverse mortgages:
- your debt rises; and
- your home equity falls.
The reverse mortgage is simply put opposite of the forward mortgage.
With a reverse mortgage, the lender sends you the payments, and you make
zero repayments. So the amount of money you owe gets larger as you
receive more and more distributions (cash) and more interest is added to
your loan balance. As your debt grows, your equity shrinks, unless
your home's value is appreciating at the same or higher rate, but this is
unlikely to ever happen.
When the reverse mortgage does actually become due, you just might end up
owing a whole lot of money and your equity may very well be nonexistent.
If you have the reverse mortgage for a long time, or if your properties
value falls, you will end up with a house and no equity. Many seniors
use this loan just for that purpose and do indeed want to spend as much of
their homes equity as they can while still living in their homes, without
having to make monthly loan repayments. There's more about this
important concept in an article called "The
Increasing Loan".