If you are retired, or at least 62 years of age, you do not need to apply for a traditional home loan. Instead, you can potentially qualify for a reverse mortgage. There are several reasons a reverse mortgage may be more appealing to you during retirement. Many of those benefits are described below, along with a few extra considerations.
Understanding the Reverse Mortgage Borrowing Difference
The first benefit you need to understand about reverse mortgages is the difference in how the money is borrowed. When applying for a traditional home loan, you usually receive a large sum of money. Then you must pay it back in small amounts over time. Generally, you owe the total sum back with interest by a set date. That date is typically a few years after you borrow the money.
A reverse mortgage works differently because you do not have to pay any portion of it back early on. In fact, you are encouraged to pay the loan back at a much later date. There is also no particular due date for total repayment. As long as you remain in the home and meet some other basic loan terms, you can spend the money without fear of the loan being called in.
Receiving Reverse Mortgage Funds from Your Lender
Another difference between a traditional mortgage and a reverse mortgage is how funds are received. A reverse mortgage allows you to continuously collect set payments of an established amount every month, if you choose. Those payments only cease when the total amount available to borrow is reached. That means, for a time at least, you can use your reverse mortgage funds to replace some of the monthly income you probably lost when you retired.
If you do not want to receive monthly installments, you can choose another reverse mortgage borrowing option. For example, you can set up a reverse loan to function as a home equity line of credit. That means you can borrow from your available balance as if it was a credit card. You can also opt to just receive one large payment, which may be handy if you are trying to pay for a major unexpected expense.
The Basic Terms of Getting a Reverse Mortgage
Not everything about reverse mortgages is easy. There are some downsides of reverse mortgages to consider. For instance, the basic terms of a reverse mortgage are you can only apply for one on the home you use as your main residence and you must be at least 62 years of age. Therefore, you cannot apply for such a loan on a piece of property on which you do not reside. Certain apartment buildings are also ineligible for reverse mortgage agreements. Although, if you live in one of the units, a small apartment building you own may qualify. If you leave the residence at any point, whatever amount you still owe is immediately due.
Reverse Mortgage Fees and Borrowing Rules
When you apply for a reverse mortgage, you may not realize there are certain fees involved. For example, you have to pay closing costs as you would with a standard loan agreement. However, those fees are typically deducted before the first payment is ever issued to you. Similarly, any amount needed to pay off an existing traditional mortgage must be deducted before other funds are issued to you.
Before getting a reverse mortgage, you must also consider interest fees. Reverse mortgages tend to accrue higher interest than standard home loans because they last longer. Therefore, you can wind up paying back a much higher amount than you initially borrow.
What Happens When a Reverse Mortgage is Due
If your reverse mortgage is ever called in for any reason, such as if you move to a different residence, you are given a time period to pay the balance back. For example, your lender may allow you six months of grace period. During that time, you must pay any amount you still owe. Failure to do so results in the home being sold. The lender keeps proceeds up to the amount needed to cover the remaining balance.