Traditional home mortgages are not always ideal, especially if you are dealing with a limited income during retirement. That is why reverse mortgages have been developed. Also known as home equity conversion mortgages (HECMs), they are special loans that can actually give you more money during retirement, rather than adding to your ongoing bills. Here’s what obtaining a reverse mortgage means.
How a Reverse Mortgage Can Make Your Retirement Easier
A reverse mortgage can make your retirement easier by giving you more available money to spend. That money can help you pay medical bills or other household expenses. It can also help you enjoy fun experiences during your retirement, such as trips. There are no limits to how you can spend it, and you will not be required to pay any of it back quickly. A standard mortgage requires small payments to be made regularly, which could actually take away from your available retirement budget.
Reverse Mortgages Versus HECMs – What’s the Difference?
There is no major difference between an HECM and a reverse mortgage. The two phrases are often used interchangeably. The only minor difference is that true HECMs are provided by government agencies. Reverse mortgages are typically provided by private local lending institutions. For example, you might get such a loan from your local bank.
Fees Associated with Reverse Mortgages and Standard Mortgages
When you apply for a reverse mortgage, it may appear at first that there are no closing costs or fees. However, your reverse mortgage lender will charge you fees, just as if you were applying for a standard mortgage. The only difference is a reverse mortgage calculator will be used to determine the amount you can borrow, and fees will also be factored in. Therefore, the money for fees will be subtracted right away, rather than you having to pay fees after the fact.
The amount you can borrow through a reverse mortgage will be calculated based on the value of your home. Legally, you can only borrow a percentage of the available home equity. Those laws are in place to protect you and your lender from entering into an unrealistic loan agreement. The formula used is subject to change based on economic conditions, but a reverse mortgage calculator tool can quickly provide you with an estimate of what you can expect to be able to borrow.
Receiving Your Reverse Mortgage Funds After Your Loan is Approved
One of the most common ways to receive reverse mortgage funds in in the form of annuity payments. Annuity payments are monthly payments you can schedule that will provide you with a set, predictable amount of money per payment. Such payments may help you if you need financial assistance with ongoing bills. A second option is you can request a single large reverse loan payment. That may be useful if you need funds for a major expense, such as to cover the cost of a surgical procedure or hospital stay. Finally, you could ask to open up a line of credit, which would let you borrow money as you need it.
Paying Reverse Mortgage Funds Back to Your Lender
There is no need to pay back a reverse mortgage right away. In fact, it is designed to be paid back well into the future. For as long as you continue to live in the home and own it, the amount owed cannot be called in by your reverse mortgage lender. However, if you do stop using the property as your primary dwelling, you will only have a short time to pay the loan balance back.
The good news is, if you cannot pay back the loan or choose not to, your other assets will not be at risk. Only the home itself can be sold for the lender to recover part or all of what is owed. If the sale of the property does not bring in enough money to cover the loan balance, whatever is left will be canceled. If the sale of the property brings in more money than you owe, you or your heirs will receive the remaining money.