When you retire, you want to live comfortably. Yet, you may have to deal with a drastically reduced income.
When you only have a low amount of money coming in, it can be difficult to fund the enjoyable things you want to do or pay for essential expenses like medical bills.
A reverse mortgage can help you alleviate those issues by allowing you to spend money that comes from the value of your home. Here is what you need to know before signing a reverse mortgage agreement.
The Reverse Mortgage Will Pay You
The reason It is called a reverse mortgage is it is somewhat the opposite of a traditional mortgage. The traditional home loan provides you with immediate money, but it also must be paid back in a short amount of time. In fact, you may have to make the first partial repayment very soon after borrowing the money. A reverse mortgage lender can continuously provide you with funds for as long as there is convertible equity to borrow. The long-term setup of the loan allows you to spend money in retirement without increasing the immediate financial burdens you have.
Amount Will Not be the Full Home Value
Before taking out a reverse mortgage, you need to understand there are federal laws in place to keep you and your lender from signing an unrealistic mortgage agreement. Those laws limit the portion of equity you can borrow. A tool called a reverse mortgage calculator is used to come up with the legally reasonable amount. It factors in things affecting home value and uses special formulas to determine how the home value affects to total amount available as ready cash.
You Will Pay More, Eventually
When you calculate how much you can value with a reverse mortgage, you also have to consider the long-term implications. What your reverse mortgage calculator determines you can borrow is not exactly what you will eventually owe back. That is because a lot of interest can accumulate over the length of the loan. It is designed to be a loan that lasts many years. That means you may find yourself unable to repay it when it finally comes due.
When the Mortgage is Due for Repayment
One of the advantages of a reverse mortgage is you cannot default on it in the traditional sense. That is because you cannot miss scheduled repayment dates, since none are scheduled in the first place. Instead, the length of your reverse loan agreement is based on how long you retain ownership of and residency in your home. As soon as you stop using the home as your main residence, you have to pay back what you borrowed with interest.
Ways of Defaulting
There are ways a reverse mortgage can go into default. For example, what you owe is due when you leave the home. If you do not submit full payment at that time, the sale of the home is required. Your lender will keep profits equal to what you owe or all profits, if there is still a remaining loan balance after the sale. Any balance that does remain is erased, after the lender receives the home sale profits.
You can also cause a reverse mortgage agreement to be negated if you fail to meet the responsibilities of home ownership. For example, you can lose your home and your loan agreement if you fail to pay your property taxes. That is why your lender is likely to require a credit check before you sign the loan agreement. The lender needs to know you have to means to maintain your home for the duration of the loan.