A reverse mortgage is a loan that lets the borrower convert a portion of their home loan into cash. When a homeowner has been in a home for a long period of time, equity builds. A reverse mortgage uses this built up equity to pay the homeowner. There are three kinds of these loans that a borrower can take advantage of: 1. single-purpose reverse mortgages, 2. proprietary reverse mortgages, and 3. federally-insured reverse mortgages. It is important to note that all types of reverse mortgages are subject to availability and are also dependent on the situation. For example, single-purpose mortgages are usually the cheapest, but they are typically used for a specific purpose (such as home repairs).
The Benefits of Reverse Mortgages
One of the benefits of a reverse mortgage is that the money received is tax-free, and generally the money does not have to be paid back as long as the borrower lives in the home. Also, most reverse mortgages can be canceled within 3 days of closing thanks to what is known as the right of “rescission.”
The Drawbacks of Reverse Mortgages
However, there are a few downsides to reverse mortgages. First, there can be additional fees and costs associated with reverse mortgages. A borrower would want to check for this before applying for a loan. Reverse mortgages are ideal for those who are renovating or have some costly home repairs that they don’t want to come out of pocket. Other reasons to think about getting a reverse mortgage include: to buy a second home, retire early, take out a business loan, or just to have some extra cash on hand. Second, to qualify for a reverse mortgage, the homeowner has to have a long standing mortgage that’s built up equity, has to be at least 62 and has to be a primary home owner.
If a borrower meets these requirements, and a reverse mortgage sounds right for their situation, here is a checklist of things to consider as they begin to go through the process:
- Identify the need
- Identify which type of reverse mortgage best fits the need
- Compare fees and costs from different lenders
- Choose a lender that is right for the borrower
- Apply for the loan through the lender
- Obtain a home appraisal
- Close on the approved loan
If a reverse mortgage is not right for a situation, or if a borrower doesn’t qualify, contact BrightPath. They’ll find out how to determine what kind of financial assistance can best benefit the borrower and the home.