If you are retired or near your retirement age, you may have heard about, or even been offered, a reverse mortgage loan. These loans allow you to borrow from your home’s equity without having to make monthly mortgage payments. This may have you thinking of questions regarding the way the reverse mortgage process works and how you may benefit from obtaining one. Here are a few common questions and answers regarding reverse mortgages. This will help you better understand your options so you can decide which mortgage is best for you.
What is the Difference Between a Reverse Mortgage and a Regular Home Mortgage?
One of the most frequently asked questions is “How is a reverse mortgage loan different from a regular mortgage?” A regular mortgage is when you borrow money from a lender and make monthly instalments while paying down the principal and interest. As your loan ages, your debt decreases, and your equity increases. In a Reverse mortgage, everything is reversed. Instead of making monthly payments, a lender makes payments to you, based on your home’s value. Over time your debt increases, and your equity decreases because the lender is buying more of the equity. You will never get a bill stating that your payment is due on a reverse mortgage and as long as you keep up the taxes, insurance, and repairs on the home, you can live there as long as you like.
When requesting money for a reverse mortgage loan, you have a few different options to choose from.
- A lump sum on your adjustable or fixed-rate loan
- A line of credit that you can access at any time
- An ongoing payment for a set amount (term payment)
- A guaranteed payment for life (tenure payment) which lasts as long as you live in the home
- A combination of a line of credit and fixed monthly payments
Most reverse mortgage lenders provide monthly payments from the equity of the home. Although you can ask for one large payment or a line of credit, you can borrow against the equity anytime you wish.
Can You Borrow All the Homes Equity in one Lump Sum?
Unfortunately, the entire value of your home, also known as its equity, is not accessible to you in a reverse mortgage. You can typically take about 60 percent of your equity in a reverse mortgage. This is because some of the equity is used to cover closing costs in advance and can run as much as 5 percent of the value of your home. Even though you cannot take out all your investment, the more equity you have, the more available money you will have from your reverse mortgage.
What if I Already Have a Regular Mortgage? Can I Have Both?
If you still owe money on an existing regular mortgage, you may still qualify for a reverse mortgage but the balance of the existing mortgage must be paid off before, or as you are closing on the reverse mortgage. You cannot maintain both mortgages at the same time. This is because the reverse mortgage will be the first lien on the title. You can pay off the existing mortgage with money from the reverse mortgage, money from your savings, etc.
Who Legally Owns Your Home When You Have a Reverse Mortgage?
With a reverse mortgage, you are still on the title and legally the owner of the home. There are certain restrictions regarding home-based businesses and renting out the home. Therefore, a reverse mortgage is helpful to those who are the age of retirement. Since you maintain ownership of the home, you must still pay your property taxes, homeowners’ insurance, and home maintenance expenses. The house must always remain your primary residence.
What Happens When the Balance is due on a Reverse Mortgage Loan?
When the loan comes due, the full amount of the loan, the money used to pay off the original mortgage, and all interest accumulated, must be paid off. There are a variety of ways of paying off the loan. It can be refinanced back into a traditional mortgage, completely paid off, or sold to pay off the balance of the reverse mortgage. The good news is that you will never owe more on the loan than the value of the home when the loan comes due.
