*This is a collaborative post.
When you retire, you qualify for certain extra perks. One is access to a reverse mortgage, which is a home mortgage only available if you are at least 62. Reverse mortgages can be beneficial, but they can also make you apprehensive, especially when you do not understand the ins and outs of them. When it comes to reverse mortgages, you need to know how the facts before you find yourself tied to a mortgage contract. Knowing how to talk the talk of reverse mortgages can help you understand them better.
The Meaning Behind the Reverse Mortgage
One of the most important reverse mortgage phrases to understand is “reverse mortgage.” What does that actually mean? The common answer is it is a mortgage that pays you instead of you paying it. More to the point, a reverse mortgage does not require the same set payment terms as a traditional home mortgage. While a standard mortgage must be repaid according to specific monthly payment terms, a reverse mortgage can actually provide you with monthly payments. Those payments are free and clear, at least in the near future. Full repayment is only necessary when your home is no longer yours.
Defining Home Equity and Home Equity You Can Borrow
Home equity, by basic definition, is the value of your home. However, home equity you can borrow is not the same amount as your total home value. Government regulations prevent you from borrowing all of what is available. One of the negative negative reverse-mortgage issues you may encounter is the total value of your home and its current value may differ for various reasons. For example, if you already have a standard mortgage, its balance must be deducted off the top of what you can borrow with a reverse mortgage. That is done so you can pay the standard mortgage off right away. You cannot legally maintain both mortgages simultaneously.
Home Equity Conversion Mortgages and Reverse Mortgages
You may also consider getting a home equity conversion mortgage (HECM) when examining the possibility of a reverse mortgage. Both are valid options. The biggest difference is an HECM is provided through an organization controlled by the federal government. For example, the Department of Housing and Urban Development (HUD) sometimes offers HECMs. Such mortgages are insured federally, as opposed to standard reverse mortgages. Those are regulated federally but not insured in the same way.
Understanding Closing Costs and Fees Associated with Reverse Mortgages
Another type of “talk” you need to have when considering a reverse mortgage is a discussion with yourself and with your lender about closing costs and fees. A reverse mortgage has such fees just as a traditional mortgage does. In most cases, such fees are deducted from what you can borrow with a reverse mortgage before money changes hands. Therefore, rather than having to pay fees out of pocket, you simply have less money available to borrow. However, you still have to factor those fees in when deciding if a reverse mortgage is right for you.
Comparing Traditional and Reverse Mortgage Loan Periods
A “loan period” is something you may already know about, especially if you have or have ever had a traditional home mortgage. It is simply the time provided for you to repay what you borrow. Five years is a typical traditional mortgage loan period, but that length of time can vary. A reverse mortgage also has a loan period, but not a clearly defined one. Instead, the loan lasts for as long as you want it to, provided you do not move away from your house and keep meeting the other loan requirements. It is that long-term nature that makes a reverse mortgage so potentially helpful during retirement.
Digesting Reverse Mortgage Talk and Making a Decision
Now you understand some definitions and terms associated with reverse mortgages. However, before opting to apply for one, it is important to truly talk the talk and carefully digest everything there is to know about the process. Talk to a reverse mortgage expert to make sure you know all of the reverse mortgage definitions and information you need. Then you can sign a reverse mortgage contract with confidence.