If you are looking to explore something a little bit more passive, something that will be more accommodating to the stage in your life that you’re currently in, you should know more about a reverse mortgage.
A reverse mortgage, it’s only available to people who are 62 years old and up. The way it works is that it is a mortgage but instead of you making monthly payments to the bank, what winds up happening is that the bank is going to make payments to you. Yes, that’s right. The way it works is let’s say you are about to hit retirement or that you are currently in retirement and you wanted to get additional money using your property as collateral. One of the requisites that you need to meet is that the house has to be fully paid or close to being fully paid.
You have to have a good chunk of equity available in your property in order to qualify for this type of mortgage. Then another criteria that you need to meet is that you have to reside in the property. You have to reside there.
The way it works is, for example, that you walk into a bank and you say, “Hey, I would like to do a reverse mortgage.” What they’re going to do, the bank, is that they’re going to do an appraisal. They’re going to see what’s the market value of your property as of today.
Reverse Mortgage: Assessment Process
Then once they get that back in, we’re going to go through an assessment. They’re going to evaluate your current situation and then they’re going to decide, “Okay, we’re willing to lend you $100,000.”, for example.
You’re getting $100,000 worth of a mortgage. Instead of you having to pay money on this mortgage, you get to decide how you can actually receive that money. You can do it in a lump sum, you can receive that on a monthly payment.
If you decide to take the monthly payment, the way it’s going to work is that in January you’re going to receive $1,000. It’s February and you’re getting another $1,000. March, then you’re receiving another $1,000 and so on. For every $1,000 you get, that means you have $99,000 left in your mortgage. Then the following month, it goes down to $98,000 and then $97,000 and so on. Then, for every amount of money that you receive every month, you won’t have to pay interest but the interests are not coming out of your pocket. What happens with those interests is that they get added back into the loan.
You’re just basically receiving the money for whatever use you want to do it. Whether it is for your daily expenses, for that emergency. Then the way the interest gets added up it’s back to whatever amount of money you own. These types of mortgages just like any other mortgage in the US, are highly-regulated.
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One of the requisites that the government has is that whatever the amount you still owe plus interest should not exceed the original value of the loan. So, whatever amount of money you keep adding back to the loan, it just simply cannot exceed that. Typically, it will happen if let’s say, you live longer than expected, you live longer than the term and you just continue to receive money, the interest rates are going to get added back up so that way, the loan is going to continue to grow.
Reverse Mortgage in case of a crisis
Another way that this could happen is that, for example, another crisis takes place like the one in 2008 and your property could tremendously drop down in value in comparison to the amount of money that you took out. Now that you understand that, you probably might be wondering, “Okay, that’s great but then what happens to the loan? Like I continue to receive money but I obviously know that the loan keeps growing and growing with interest rate.”
Two things could happen:
- You can choose to move out of the property and therefore you have to sell the property in order to use the proceeds to pay back the loan.
- You simply passed away and you’ve made arrangements beforehand to have the property sold and then the bank is going to get back their payments that they issued you during the time that you were alive.
That sounds interesting and you probably want to learn more. So, how exactly do you get paid with that mortgage? One of the ways that you can get paid and you can negotiate with the bank is by receiving a lump sum. This is actually very similar to a cash-out refi in the sense that you get all the money in one shot but the difference is that with a cash-out refi you have to repay the money back and with a reverse mortgage, you don’t. You do that after you move out of the property or after you have passed away.
The second way you can choose to receive that money from the mortgage is through an annuity. You’re just going to receive money indefinitely until you decide to stop. You decide to stop by either moving out of the property or you just again, once again, passed away and then you left everything set up so that way either your heirs or whoever is it that you choose to take care of the property afterwards can sell the house and then use the proceeds from the sale and then just repay this loan.
Another way you can choose to get paid is through a line of credit. A line of credit works very similar to a HELOC. For example, you agree with the bank that your house is worth $100,000 and then the bank is willing to lend you $100,000 but you have that as a line of credit. You don’t take the money right away but you know it’s there available for you. It’s very similar only that once again, you have to repay that money back as soon as you get the money. With a line of credit, with a reverse mortgage, you don’t but you do it afterwards.
Reverse Mortgage: Term Agreement
The next way you can choose to get paid is through a term agreement. You can select, “Hey, I want to get paid for the next 10 years or for the next 15 years.” That’s something that gets cap based on whatever amount of time you choose to get paid. You can choose to have a line of credit and monthly payments until you just decide to stop or you can choose to have term payments and a line of credit as a way to get payments.
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That sounds great. How do you know whether that’s something that’s suitable for you or not? The answer is: only you know your situation. We inform you about this type of product. Your part is to evaluate your situation and see how much money you truly need.
Do you really want to go through something as invasive as getting another mortgage or is it something that you can take care of? with maybe a personal loan or borrowing money from families or perhaps applying for a credit card if the amount of money that you need is actually relatively small compared to something as big as a mortgage. If in the end, you decide that this is something you definitely want to pursue because maybe your needs, your monetary needs are actually bigger than that, then you should consider the following:
- If you were to pursue a reverse mortgage then you have to take into consideration the interest rates. Never forget about the interest rates.
- The next thing that you might want to take into consideration are closing cost and, of course, the mortgage origination cost.
- The last thing that you also have to take into consideration is to beware of scams.
There are a lot of people out there trying to take advantage of senior people because maybe they see that they’re in a desperate situation or they just simply like to rob people out of their money and the equity of their properties.
Also, a list of banks that are actually approved by that organization so that way you know that in the event that you choose to pursue one of these mortgages, you know exactly who to work with so that way you are placing yourself in the best hands possible.
National Reverse Mortgage Lenders Association
This is the go-to page for you to find out anything that’s related about reverse mortgages. They have lots and lots of resources that you can definitely check out. When in doubt, whether you’re dealing with a scammer or not, this is also the right page for you to come in and find out about any announcements that they might have.
Their vendor directory, it’s basically a list of all the members who provide vital services to reverse mortgage lenders. Amongst them is 1st Nations Reverse Mortgage, they also have attorneys and title agencies that they have endorsed and work with them. In the event that you definitely want to check out what they provide, then just go to that site and visit their vendor directory.
List of banks that you can work with
- Nations Reverse Mortgage: You can visit their website and see how actually they work and their FAQ.
- American Advisory Group: They have a 1-800 number that you can actually reach out and ask questions.
- One Reverse Mortgage: They have their own calculator, reviews, they have a free info kit. It’s been featured in The Wall Street Journal. Definitely a great page. They have a blog, they have a YouTube channel as well in the event that you want to learn a little bit more about them before reaching out and taking that big step.
- Liberty Home Equity: They offer this type of mortgage as well. You can check what they do, meet their client, for senior clients, wholesale partners, personal stories.
You can definitely educate yourself more in the subject before you even reach out to them and learn more and see whether this type of product is the right fit for you.
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