Reverse Mortgage Information
Most people reach a point when they could use some extra income, especially as the Golden Years approach. Senior citizens often require an added influx of cash, whether it's monthly income, lump sums, long-term care or open credit. One method for getting some much-needed income is known as the "reverse mortgage." With a reverse mortgage, you take out a loan for a set amount of money on a home that you own. You are not required to make any payments until your home is sold.
In a regular mortgage, the borrower pays the lender monthly payments that slowly reduce the amount of debt on the home. Additionally, with each payment, the borrower's equity in the home (the amount of the home's value belonging to the owner) increases. A reverse mortgage is the same principle in reverse: The lender pays the borrower, as the borrower's debt increases and equity decreases.
The qualifications for a reverse mortgage are different from the qualifications you would need to meet to get a traditional mortgage.
Reverse Mortgage Qualifications
- A traditional mortgage requires employment and income information and a host of other criteria depending on how much you want to borrow. To qualify for a reverse mortgage, you need to be 62 or older and own and reside in your home. You do not need to meet any income guidelines, because the loan is based on the value of your home, not your income. You do not need to have any income at all to get a reverse mortgage. You can obtain a reverse mortgage to generate an income for yourself.
- With a traditional mortgage you have to make your monthly mortgage payments or else your mortgage goes into default and faces foreclosure. With a reverse mortgage, you never have to make monthly payments, so there is no chance of losing your home or going into default because of a missed payment.
- Traditional mortgages do not require you to keep the home in good condition in order to keep your loan. You may be required to incorporate your property taxes and home owners insurance into your mortgage payments by way of an escrow account. Reverse mortgages require you to pay your property taxes and keep home owners insurance on the property, and they also require you to keep the home in good repair while you are living in the house. This is required because the lender wants to be certain that the property holds it market value. When you take a reverse mortgage, the lender will collect the loan at the time the home is sold or when you die, whichever comes first. So the lender needs to make sure that the value of the loan plus interest does not exceed the value of the home, or they would lose money from the loan. If you let the house go into disrepair, the lender can call in your loan and force you to come up with the balance or sell your home.
- Both traditional mortgages and reverse mortgages involve taking a loan against the property and tapping the equity in the value of the home, but they do it in opposite ways. With a traditional mortgage you make a down payment on the home and take a mortgage loan for the remainder of money you need to purchase the home. With a reverse mortgage you already own your home and you are taking a loan against the equity you've built. You do not have to make monthly payments, but the loan is paid back when you no longer live in the home.
- Both traditional mortgages and reverse mortgages charge fees and interest. You pay interest monthly in your payments with a traditional mortgage and with a reverse mortgage your interest accumulates and is paid when you no longer live in the home. Both types of mortgages charge similar fees when you go through the qualification process of applying for the loan. These can include a loan origination fee, appraisal fees and closing costs. A reverse mortgage may also come with a servicing fee, because many seniors choose to have their reverse mortgage loan money paid to them monthly or available to use as open credit.
These are some of the differences and similarities of traditional mortgages verses reverse mortgages. You can also learn more about this topic from the AARP.
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