You don’t want to work after you retire or do you? There are various plans and schemes run by the state and the organizations that provide post-retirement benefits to Senior citizens. One such loan scheme is “Reverse Mortgage Loans”, in this article you will come across everything you need to know about this loan.
Reverse Mortgage Loans are provided to people who are more than 62 years of age. The loan amount is assigned to them against the equity share of their house. The borrower doesn’t have to pay the principal or the interest amount. The debt is taken from them after their death by selling their house. This guide on Reverse Mortgage loans will tell you about all the pros and cons of this loan that will help you to decide which type of loan is better for you.
The three types of Reverse Mortgage Loans are
- Single Purpose Reverse Mortgage
- Home Equity Conversion Mortgage
- Proprietary Reverse Mortgage
Further in the article, you will be reading about everything related to Reverse Mortgage loans. How these loans will help you in securing your retirement and what all methods of payments you can choose?
Reverse Mortgage Loans – The Guide
Let us start this guide with what is a Reverse Mortgage loan, then we will move to its types, methods of payments, and finally to the pros and cons of the loan.
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What is Reverse Mortgage?
A Reverse Mortgage is a type of loan. People call it the opposite of the Forward Mortgage loans. Well, to understand what Reverse Mortgage loans let us compare them with Forward Mortgage Loans.
A forward Mortgage loan is taken by the person to buy or build a house whereas the reverse mortgage is used to sell a home. A loan to sell? Confused?? Okay, let me put this in simpler words now.
When a homeowner turns 62, he can borrow a considerable amount of loan against the value of their home equity. The only difference between the Reverse Mortgage Loan and the other loans is that you don’t have to pay the principal amount or the loan interest to the lender. Instead, the lender will pay you.
You will get a more clear picture of it after you read the next section on How Reverse Mortgage Loans work.
How Reverse Mortgage Loans Work
As we already told you that instead of paying the principal or the interest amount to the lender. The lender will pay you the amount. When a citizen turns 62, he can qualify for a reverse mortgage loan. Now, it is the choice of the borrower how he wants the payment (Discussed further in the article). Well, this doesn’t mean that the borrower will not pay back at all.
The house against which the borrower has taken the loan will be taken away by the lender after the borrower dies, or sells his place, or moves to another city.
There are certain points that you must keep in mind:
- The homeowner keeps the title over the house during the period of the loan.
- The debt on the house owner increases and the home equity value decreases over the period of the loan.
- If the house sale proceeds, the Principal and the Loan Interest amount. The extra amount goes to the homeowner or his heir if he is dead.
- The proceeds in Reverse Mortgage are not taxable.
- If the heirs of the person wish to keep the house, they can pay the debt amount to the lender and keep the house.
Types Of Reverse Mortgage Loans
There are three types of Reverse Mortgage Loans depending on their terms and conditions. All of them are listed below with their issuing authorities.
Single Purpose Reverse Mortgage
Issued By – State, Local, and Nonprofit Agencies
Home Equity Conversion Mortgage
Issued By – U.S. Department of Housing and Urban Development.
Proprietary Reverse Mortgage
Issued By – Federally Backed By HECMs
Ways To Receive The Reverse Mortgage Loans Payment
There are a total of six ways in which we can receive Reverse Mortgage Loans Payments. We have listed them below for you. You can choose the one that suits you the best.
- Lump-Sum: This payment method refers to the type in which you can receive all the proceeds at once after all the loaning process is complete. This way comes with a fixed interest rate whereas the other five ways have adjustable rates according to the method and amount you choose.
- Equal Monthly Payments: Under this payments method the lender will keep on making steady payments to the homeowner. Until one of the borrowers is alive. This plan is also known as the Tenure plan.
- Term Payments: In this payment method the lender pays the borrower an equal amount of money for a set period of time.
- Line of Credit: In this method, the homeowner borrows the money from the lender when he needs it and only pays the interest on the amount he borrowed.
- Equal Monthly Payments Plus a Line of Credit: Well, this is the mixture of the Equal monthly payments and the line of credit. The borrower will be delivered the steady payment but if he needs more money the borrower can shift to Line of credit (Discussed above).
- Term Payments Plus a Line of Credit: Now, this payment method is a mixture of the Term payments method and the line of credit method. If the borrower needs extra money during the tenure or after it he can access the line of credit.
Pros And Cons Of Reverse Mortgage Loans
Now you know what Reverse Mortgage Loans are. So, here we are with its pros and cons.
Pros Of Reverse Mortgage Loans
- It helps you in securing your retirement.
- You can choose to stay at your home, instead of working.
- You can use it to pay off your existing Home Loan
- You won’t be liable to pay tax.
- You’re Protected If the Balance Exceeds Your Home’s Value.
Cons Of Reverse Mortgage Loans
- There are chances that you might lose your home to foreclosure.
- Your Heirs will not inherit what you have
- It is not free.
- It may impact some of the Retirement benefits
- Mortgage Loans are complicated
We hope now you are clear with what are “Reverse Mortgage Loans”. But it is always recommendable to think twice before borrowing a loan. It may put you in debt for life and beware of the fraudsters committing mortgage loans to the senior citizens. If you want to go for the Reverse Mortgage loan then we recommend that you go for the Home Equity Conversion Mortgage (HECMs).
If you still have doubts about the topic then do write to us in the comments section. We will be happy to help.
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