We hear a lot about reverse mortgages today, but in spite of that, there’s still a great deal of confusion surrounding them. In simplest terms, a reverse mortgage is a species of home equity loan for homeowners 62 years old or older that does not require monthly payments. Once considered a kind of last-resort source of money, reverse mortgages have now expanded their uses. Let’s take a closer look, then, at what exactly a reverse mortgage is and how it can help Metro Detroit Michigan homeowners.
What Is a Reverse Mortgage?
As we mentioned, a reverse mortgage is just a specialized kind of home equity loan available to homeowners 62 years old or older. If the homeowner has substantial equity in her home, she can borrow against it to get money in a lump sum, in monthly payments, or in a line of credit. And unlike a conventional “forward” mortgage, a reverse mortgage doesn’t require the borrower/homeowner to make loan payments.
With a reverse mortgage, the entire loan balance comes due and payable when the borrower dies, sells the home, or moves. The mortgage cannot, as per federal regulations, be structured to exceed the home’s value. That way, the borrower’s estate won’t have to make up any difference even if the home’s value decreases due to market fluctuations.
Most people who get a reverse mortgage do so to get needed cash (often for living expenses, home upkeep, and medical bills) when most of their net worth is tied up in the home. Reverse mortgages can help Metro Detroit Michigan homeowners, but do call for careful consideration because they can be both costly and complex and are subject to scams.
How It Works
With a reverse mortgage, then, you don’t make payments to the lender – the lender makes payments to you. You also get to choose how you will receive the payments, and interest is rolled into the loan balance so that it’s not an unexpected expense. You also keep the title to your home, but over the life of the loan, your debt increases, and the equity decreases.
Your home’s equity is, of course, the collateral that secures the loan. It’s just that you as the borrower never have to pay anything because nothing comes due till you die (in most cases if you continue to live in the home). At that point, your home will be sold, and the proceeds will go directly to the lender to pay off the principal, interest, insurance, and fees. Occasionally, heirs opt to pay off the mortgage so that they can keep the home.
How a Reverse Mortgage Can Help Metro Detroit Michigan Homeowners
A reverse mortgage can help Metro Detroit Michigan homeowners in several ways, including providing:
- A way to access home equity without having to sell the home
- Those who can’t qualify for a home equity loan a way to access their home equity
- A way to have a large lump sum of cash or line of credit when needed
- A loan that requires no monthly payments
- A method to keep up cash flow when all your assets are tied up in your home
- Non-taxable income because the IRS considers a reverse mortgage a loan advance
But Consider Carefully . . .
Despite these many obvious benefits of a reverse mortgage, there are definite pitfalls and drawbacks that you must take into account before making a final decision. You will, for example, spend a large part of your accumulated home equity on interest and loan fees. And you will most likely not be able to pass your home on to your heirs. Basically, if a reverse mortgage provides only a short-term solution to your financial problems, it may not be the best solution for you. You should, then, consult with both financial and real estate professionals to determine whether a reverse mortgage is right for you as a Metro Detroit Michigan homeowner.