| People tend to shy away from the very idea of reverse mortgages, in part because of their former bad rap, and in part because of all the scary terminology. If you're one of millions of people who are unfamiliar with real estate terms, when someone starts spouting off about how you can "utilize the equity in your home on deferred payments with a conversion mortgage," chances are pretty good you're going to tune it out. Checking out how it works Reverse mortgages pay you to continue living in your home. You can think of your home as the Bank of You: You're borrowing money that you would have earned had you sold your house. You can then use the money for whatever you want. Anything your heart desires (and your wallet can handle) is yours for the taking, whether it's a vacation in Switzerland, moving your master bedroom to the first floor, or sending yourself to college! The concept is kind of abstract if you've been paying a lender for the past 30 years or so, and it may be difficult to grasp at first. Take a look at the quick reference points below. Once you get the gist of it, you can educate your friends and family about reverse mortgages. Next time you're at a cocktail party, holiday dinner, social lunch, or any time reverse mortgages come up in conversation, you can dazzle everyone with your knowledge. Here's a quick rundown: - You're a homeowner who owes little or nothing on your home. You decide you need more money to live the lifestyle you want, but your biggest asset is your home and you certainly don't want to sell it to get the money you need.
- A reverse mortgage lender figures out how much it can lend you based on your home value, your age, and interest rates, and loans you some percentage of the money you would have gotten if you'd decided to sell your home.
- You still own your home and continue to live in it, but now you're getting payments from the lender, so your cash flow problem is solved.
- You pay the loan back (with interest) only when you don't live in the house full time anymore, usually due to moving out or death.
- You never owe more than your home is worth, no matter how much you've accumulated in debt.
- You keep any leftover equity after the sale of the house; if you owe the lender $67,000 and your home sells for $200,000, you put the difference in your pocket and walk away smiling.
A reverse mortgage is sometimes called a deferred payment loan, and for a very good reason. Instead of paying off the home loan as you borrow money, the payments are put off (deferred). This is why reverse mortgages can be such a good choice for seniors; when you're on a fixed income or living off of your savings, it can help to have some extra cash in hand to supplement. Because payment is deferred, you are spending the equity in your home, rather than earning it (as you would with a traditional forward mortgage). Since equity is an intangible value, you never feel the effects of the equity going down, but you sure feel the money flowing steadily into your checking account! Being over the hill pays off There is a lot of ageism in society today, especially from employers retailers. Even Hollywood starlets have a hard time finding work at a certain age. After a while you may start to think that the only advantage to old age is the 10-percent-off discount on Tuesdays at the local Bar & Grille. But reverse mortgages operate for seniors and seniors only — whippersnappers need not apply. If you are a homeowner age 62 or older, you will probably qualify for a reverse mortgage. There are no credit checks, and no income requirements. Even better, the older you are, the more money you can usually get from your reverse mortgage. That's because the reverse mortgage lenders (big companies like the department of Housing and Urban Development, Fannie Mae, and Financial Freedom) are playing the odds. If you're 86, chances are good that they won't have to service your loan for very long — you may need to move to assisted living or pass away within only a few years, thus ending the loan. A 62-year-old, by contrast, probably has about 20 good years before the lender even needs to think about ending the loan. When has your age ever worked to your advantage like this? Getting rid of common misconceptions Today's reverse mortgages are safe, effective, and definitely in the best interest of the borrower. It's a whole new generation of loans. Take a look at the misconceptions below, and the truths that follow: - The lender gets your house. This is by far the most widely misunderstood fallacies about reverse mortgages. In fact, you keep ownership of your home. The lender has no rights to your home and can't foreclose on you as long as you keep up with your taxes and insurance. Part of the confusion about this area stems from the fact that many reverse mortgage borrowers choose to sell their homes to pay off the loan when they move. And it makes perfect sense — what do you need with that house if you're not living there? But remember, you're selling to another regular buyer, not the lender.
- You'll have no estate left. Many seniors are concerned that a reverse mortgage keeps them from leaving anything to their children. The fact is, the way you pay off your loan is up to you and your heirs. It's also up to you to decide who you want to leave your estate to. Unless you form an emotional bond with your lender and leave your estate to them, your family or whomever you name in your will is the inheritor of your estate. Of course, they need to pay back the loan, but it's up to them how they carry out that responsibility.
- You won't qualify because of poor credit. If you have bad credit, or even moderate credit, you may have been turned down for a loan in the past. It's embarrassing, frustrating, and inconvenient. Reverse mortgages work differently: You can never be denied a loan because of bad credit — it's not even a consideration in your approval. The originator or lender runs a credit report, but it's only to make sure you don't owe the government any money (usually in back taxes). If you do, you have to use a portion of your reverse mortgage money to pay back those debts before you can start spending on yourself.
- You have to be debt free. While you are required to own a home in order to get a reverse mortgage, you do not have to own it "free and clear." One of the benefits of a reverse mortgage is that it can help pay off your remaining forward mortgage, leaving you without house payments for what may be the first time in your adult life. Here's how it works: The lender determines how much it can let you borrow and then deducts the amount you still owe from your available funds. That money pays off the first loan, and then you're free to do what you wish with the rest of the money.
- Only desperate people get reverse mortgages. At one time, this may have been true. However, today's reverse mortgage borrower is more likely to get a loan out of want, rather than need. In fact, a growing number of people who have no immediate need are taking out these loans because they like the security of having a financial cushion, or are planning for future expenses.
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