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How Does A Reverse Mortgage Work: Reverse Mortgages Explained

·5 min read

What is a Reverse Mortgage?

Are you interested in finding out about how a reverse mortgage works? A reverse mortgage is a financial agreement where the homeowner borrows money on their home's value, usually to supplement retirement income. It is a 'win-win' situation enabling the borrower to access the property's value while living in it and not being required to make monthly repayments.

Reverse mortgages allow homeowners who are sixty-two years or older to draw from the equity in their home. When you have a reverse mortgage loan on a property with considerable equity, you'll be able to draw on said equity without having to repay until you leave the house.

Additionally, the funds lent will be returned to the mortgage lender, with accrued interest on the occupant's death and the borrower.

The Reverse Mortgage Explained

Sometimes the home that you inherited can include a mortgage. Now that property is so costly, a lifetime is not always long enough to pay for a mortgage, and sometimes funds are still owed when the occupant dies. If you are the heir to such a property, you also inherit the mortgage.

If you are not the only heir, legal advice is essential. Once you have seen your legal counsel, you will know what your options are. You may be able to move into the home and take on the mortgage, refinance, and payout the other beneficiary half the house's agreed value, based on a professional valuation.

On the other hand, you could sell the house, payout the mortgage, and split the profit with the other beneficiary.

How Much Can You Borrow With a Reverse Mortgage?

More often than not, you will not be able to borrow the whole value of the house, even when the mortgage balance is zero. What you will be able to borrow is known as the principal limit. The principal limit will vary based upon the youngest borrower's age or eligible no-borrowing spouse, the home's appraisal value, current interest rates, and the HECM mortgage limit, which is currently $765,200.

The mortgage limit can change from year to year, so you will need to check. Owners usually receive a higher principal limit when the house is worth more, they are older, and the interest rate is low.

What Can Reverse Mortgage Funds Be Used For?

Can reverse mortgage funds be used for anything? No. As a general rule, the money from a reverse mortgage can be used as supplemental income for retirement, paying for medical expenses, or improving the property. These are what are generally considered acceptable uses for the funds.

Financial Deregulation and Reverse Mortgages

The Garn-St. Germain Act of 1982 provides heirs with protection when assuming an existing home loan. Massive changes were seen in financial markets both in the late 1970s and 1980s, often leading to volatile interest rates and increased competition.

The deregulation came in the form of a new federal law known as The Garn-St, Germain Act (1982), bringing about many financial benefits. So, when you assume a mortgage, the provider should be willing to work with you because, under the act, the heirs are permitted to assume a loan, giving certain protections that could be an advantage to you.

It will usually make it difficult for the lender to invoke the 'due on sale' or 'due on transfer' clause. In many cases, your name as an heir can be added to the existing mortgage when the owner/ borrower has died. If you are the spouse of someone who has died, you have special protection to allow you to keep the property for your life.

If you inherit such a property, you will be required to work with the lender to update the paperwork to protect all parties.

When You Inherit a Reverse Mortgage

When you inherit a property, it may involve a reverse mortgage or a Home Equity Conversion Mortgage (HECM). If a parent has died and you find yourself in this situation, you have several options:

  • Pay of the loan.

  • Refinance and keep the home.

  • Sell the home, pay off the loan, and keep the balance.

You have six months to take one of these options; if you are actively working to repay the debt, this time can be extended. If the reverse loan is not paid off after one year, the lender is required, by law, to begin the foreclosure process as a formal way of closing procedures when the borrower or spouse ( if the borrower has already passed) has died.

While the spouse is alive, nothing will change. If the remaining spouse has not been married to the borrower, it is up to the heir to decide whether to allow them to remain in the house.

When The Value is No Longer in The House

If the home has negative equity, meaning more is owed than the property's actual value, it might be better to sell and repay the value of the property; that is the most that will have to be paid.

If the borrower dies intestate ( without a will), and you feel the house should have gone to you, see an attorney quickly, as this needs sorting out, and if you are a child of the borrower, you will have some rights.

Conclusion on Reverse Mortgage Loans

Having a Reverse Mortgage is a great way for many older people to live out their lives without the ongoing financial worries of finding the monthly repayment. Most properties continue to gain in value, so the equity is nearly always going to be there.

When you are interested in moving forward with a reverse mortgage, it is important to speak with a HUD-approved counselor before committing to this type of loan. If you are planning on getting a HECM is will be a requirement you work through a counselor. You will still need to get approved for the mortgage just like you would with any other loan.

The counselor will help to provide you with the pros and cons of a reverse mortgage. They will also explain how this kind of loan could impact your heirs upon your death.

Hopefully, you have found this guide on reverse mortgages to be useful.

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