What is Home Equity?
When you take out a mortgage to purchase a property, your terms will include interest rates that will be included in the monthly repayment of the debt. During the initial periods of the mortgage most of the payments, you make go towards the payment of the insurance. But over time as you continue to make payments the interest rate goes down and your repayment starts paying off more of the loan amount.
The more payments you continue to make the more ownership of the property you keep gaining. For example, if you have made payments worth 50% of your total mortgage amount, then you have 50% ownership of the property. This is known as Home Equity. It is the amount the borrower has paid off from the loan.
What is a Reverse Mortgage?
Now that we have covered Equity, we can talk about a Reverse Mortgage.
A Reverse Mortgage is a special type of loan available to people who are over the age of 62 and have already paid off their mortgage or at least most of their mortgage payment has been completed. This loan allows the homeowner to convert part of the equity into cash.
When a person takes out a reverse mortgage loan, the property remains under their name. However, unlike a traditional mortgage plan, they don’t have to make monthly payments towards repayment at all. Instead, they are given monthly payments by the lender from the equity until the loan amount is completed.
How does a Reverse Mortgage work?
The borrower will approach a lender for a reverse mortgage. Once it has been established that the borrower meets all the loan requirements the borrower will be offered the options of getting a cash amount, a series of monthly payments, or a credit line. This amount is based on the equity the borrower has gathered over the time of making the mortgage payments. While the loan is active, the borrower does not have to make any payments towards the reverse mortgage. However, the homeowner is required to pay property taxes, maintain the property, keep it as their primary residence and arrange for private mortgage insurance.
The loan is repaid when the borrower moves out of the property or sells it. Each month interest amounts and applicable fees are added to the loan so over time the loan amount goes up and not down, as it would in a traditional mortgage. Additionally, as the loan amount increases the equity of the homeowner also decreases.
Can I cancel a Reverse Mortgage if I change my mind?
Yes, if you change your mind about the reverse mortgage, you can cancel. Reverse mortgages include the right to “rescission”. Once the deal is signed, you have 3 days to inform the lender that you want to cancel the reverse mortgage. Doing so after the 3 days will result in penalties.
What are the requirements for Reverse Mortgages?
To qualify for a Reverse Mortgage, you have to meet the following eligibility criteria:
- You have to be a min of 62 years
- You should have paid off a major portion of your mortgage on the property
- The home should be your primary residence
- You should owe zero federal debts
- You should have enough money to pay property tax, fees, maintenance of the property, etc
- Your property should meet the guidelines of the reverse mortgage
How much can you borrow on a Reverse Mortgage?
You can get approved up to a certain amount from the equity you have already covered. How much of that you get approved for will depend on the lending trends and the lender’s policies regarding reverse mortgages. There are Federal regulations that require the loan amount to remain less than the home’s market value. So an appraisal will be required as part of the process of the lender to determine the amount for the approval.