If you are approaching age 62, you may have heard of a loan that can help you when you retire. The loan, called a reverse mortgage, is a popular alternative to a traditional home loan. But there are a lot of rumors about reverse mortgages that are not true. Not only that, but some reverse mortgage facts can be confusing. Here are some need-to-know truths about reverse mortgages.
Reverse Mortgages Really Do Pay You
You may have heard a reverse mortgage described as a mortgage that pays you, as opposed to one you constantly have to pay back. That is true. A reverse mortgage allows you to collect funds from your lender worry free for a long period. No bills are issued to you immediately, and there is no schedule of payments you have to follow.
You Have to Live in the Home to Apply for a Reverse Mortgage
You cannot apply for a reverse mortgage on any property you own. That is one of the potential downsides of reverse mortgages. The building must be your main residence to have a chance of qualifying. You may own a vacation home or take trips away, as long as you do not vacate the property for an extended period. That period can vary by lender. Typically, a reverse mortgage is taken out on a single-family home. However, a small multi-family home can qualify, as long as you own the property and live in one of the apartments.
You Cannot Borrow the Full Home Value When You Get a Reverse Mortgage
Another reverse mortgage truth is your home must have a fairy high value to make getting a reverse mortgage feasible. That is because federal law forbids you from borrowing the full value. The amount you can borrow is based on a formula established at the federal level. An online tool called a reverse mortgage calculator is used to determine what you can borrow according to that formula. Your lender will discuss the reverse mortgage calculator results with you when setting up the terms of the loan.
You Select How the Reverse Mortgage Funds Are Supplied to You
After establishing how much you can borrow, you must also establish how you want to borrow those funds. You can select to divide the amount determined by the reverse mortgage calculator into equal monthly payments for a period of time. Alternatively, you can set up a home equity line of credit that will let you borrow money repeatedly until you hit your borrowing cap, but only when you choose to do so. The third option is to request a lump sum payment you can receive one time only.
Reverse Mortgage Lengths Can Vary Greatly
A traditional home loan often lasts for a particular number of years. For example, a five-year loan is a common option. A reverse mortgage does not have an exact loan period. You can have a completely different loan duration from another borrower because the duration is primarily determined by how long you continue living in the home. The full balance is usually due whenever you move out. Although, it can also be due when you default on the loan agreement in another way.
Your Other Assets Are Safe When You Get a Reverse Mortgage
One worry you may have is what happens if you cannot pay back a reverse mortgage. That may be a particular concern because reverse mortgages are long-term loans that tend to accumulate a lot of interest. The home can be sold so the lender can recover some or all of what you owe. However, other assets like your vehicle cannot be confiscated by your lender. Instead, any balance still remaining after the sale of the home is erased.