What is Reverse Mortgage | How does it Work | Pros and Cons
What is Reverse Mortgage
A reverse mortgage could be an excellent way to supplement your retirement income. Let us first understand how the reverse mortgage works. First, think of how your home mortgage works as you make monthly payments, the amount of equity in your home increases. This equity is the money that is tied o the value of your home.
A reverse mortgage allows you to borrow that money in payments made back to you. As you receive cash payments, the equity in your home decreases gradually. Also, the loan balance slowly increases over time.
The reverse mortgage is repaid if the homeowners or the borrowers leave the house. A reverse mortgage allows you to access the cash in your home while you still live in it.
How Does Reverse Mortgage Work (Rules)
There are some rules for reverse mortgages. The borrowers must be at least 62 years old. The property in question must be your primary residence. You must own your home and have substantial equity in your home.
You must have enough resources to keep up with the property taxes, insurance, and home owner’s insurance fees. Many other rules also apply, make sure you understand them from your trusted mortgage advisor before you apply for a reverse mortgage.
Pros of Reverse Mortgage
The most pros of reverse mortgage is that you never have to make a payment. To qualify for the reverse mortgage, you do not need to have a good credit score. You would have access to your home equity without leaving home.
You would be able to acquire that cash without selling the house. Doing so, you can add to your monthly income. If you decide to take a line of credit while getting a reverse mortgage, it grows over time.
The line of credit grows equal to the loan rate, plus 1.25%. Over time you would have access to much more money. If you never have an emergency and do not need to take the money from the line of credit, then you haven’t borrowed those funds. And your heirs have a much lower balance to pay off when they inherit your home.
Cons of Reverse Mortgage
The biggest cons of a reverse mortgage is that it is expensive. The closing cost on a reverse mortgage could be more than that on a traditional mortgage. So you must compare mortgage lenders and fees for best deals. You can disinherit your children from getting that home
Even if your heirs are inheriting the house, it comes with a lien which needs to be paid in full within six months. The balance on a reverse mortgage increases over time. You will owe more on the mortgage in 10 years than you do after the first year.
Refinance a Reverse Mortgage
A lot of people do not know that they can refinance their existing reverse mortgage. The most crucial reason for refinance reverse mortgage is that you might end up getting more money. When you get a reverse mortgage what it does is, it calculates how much you can borrow based upon your age and it multiplies by the appraised value of the house.
If you already have a reverse mortgage for a few years and now the current value of the home is appraised, you can always get the existing reverse mortgage refinanced and get more money.
It makes a perfect sense to refinance a reverse mortgage because if you don’t borrow that money, it will end up going away anyway.
Since the reverse mortgage appreciation works on the principal balance, it is better to refinance your reverse mortgage. Take that extra money in the form of cash or line of credit. It might be challenging to qualify for the reverse mortgage refinance as the parameters are too stringent.
However, you can always talk to your trusted mortgage advisor and see the numbers if the work in your favor.
Conclusion
Getting a reverse mortgage and refinancing it could be one of the most crucial decisions you might have to take. We always suggest you seek advice from your trusted mortgage advisor who can guide better in your situation.
Since refinancing on reverse mortgage comes with quite a challenge, you need to be assertive whether or not you need to get it done. Eventually, every penny saved is a penny earned.
