There are many great aspects of retirement, but one aspect that is not so great is losing the income that comes with working full-time. Although you may still receive a pension, your income will be drastically reduced. Even though retirement comes with an income reduction, there are financial retirement aids available. One of them is a reverse mortgage. Here is what you need to know about how a reverse mortgage can help you.
Receiving Reverse Mortgage Payments
A reverse mortgage is a home loan, but it is not like a standard mortgage. When you take out a standard loan, you will receive ongoing bills requiring you to pay it back in small increments by a set deadline. A reverse mortgage allows you to spend part of the value of your home (equity) without having to pay any of it back for a long time. In fact, your reverse mortgage lender will send you monthly installments upon which you can rely until you have exhausted the amount you can borrow, unless you set up other payment terms. That is why such a loan is considered “reverse.”
Other available payment terms for a reverse mortgage include a lump sum and a line of credit. A lump sum is a single payment you can use to cover a major expense. A line of credit may be more beneficial to you when you want to access extra money occasionally only when you need to. You can talk to your reverse mortgage lender when setting up your loan to set those terms.
Determining the Amount of Equity You Can Legally Access
There are several issues that must be considered when determining how much of your home equity you can access. Your lender will use a tool called a reverse mortgage calculator to come up with a total amount. Factors that must be considered include the current market value of your home and federal laws that prohibit you from borrowing that full amount. The reverse-mortgage calculation tool will give you a precise figure available. Then you and your lender can determine the size of each payment you will receive.
Fee Considerations When Applying for a Reverse Mortgage
When you apply for a traditional mortgage, fees and closing costs are required. Similar fees are attached to reverse mortgages, but they are paid differently. What you owe for closing costs and fees will be deducted from the total amount you can borrow. Additionally, reverse mortgages accumulate a lot of interest because they are long-term loans. So, when the balance is finally due, you will owe much more than you initially receive.
Getting a Reverse Mortgage When You Already Have a Standard Home Loan
You can apply for a reverse mortgage when you already have a standard loan on your home. However, the two cannot be maintained simultaneously. You must pay the standard home mortgage balance right away using some of the reverse mortgage funds. Therefore, the amount of money you can freely spend will be lower than if you had no existing home loan before applying.
Reverse Mortgages and Home Ownership Requirements
When you apply for a reverse mortgage, you are required to maintain ownership of and residency in the home. It has to stay your primary residence until the loan is paid back. You must also retain responsibility for paying the taxes and other expenses related to maintaining the home. You may not apply for a reverse mortgage on a vacation rental or any home you only stay in temporarily.