There is no place better than the United States of America when it comes to creative finance and a reverse mortgage is one of those creations.
Unlike a refinance of an existing mortgage or home equity line of credit (HELOC), the reverse mortgage borrower does not make any loan repayments until their death. At this point their estate must settle the debt on the behalf of the deceased borrower.
Reverse mortgages are only available for people aged 62 or older. They allow a senior citizen to access the equity that they have built in their property without having to sell their home. This allows the borrower to age in place and live with dignity in their home.
Another important feature is that there is no income requirement to qualify for a reverse mortgage, the entire loan is based on the equity the borrower has in the property itself. This is especially beneficial for those on a fixed income through social security and/or a pension.
When a reverse mortgage closes, the borrower does not necessarily receive a lump sum of money at closing. Instead, they could receive access to the capital through a line of credit, just like a HELOC. With either option, a lien is placed on the property to secure the debt.
There were many problems with reverse mortgages in the early days so the federal government stepped in to place restrictions on these loans. Below are a few:
- Borrower must be age 62 or older
- Property must be your primary residence
- Borrower must have the ability to pay all carrying costs such as insurance, taxes and maintenance
- The maximum amount that can be borrowed is $970,800.
- Borrower must carry insurance to pay back the lender in case of default
For a senior who has no plan to leave their home to an heir or wishes to remain financially independent from their children, the reverse mortgage provides wonderful benefits both financially and mentally.
If you or a family member are interested in reverse mortgages, you should find a company that specializes in them as it is a highly regulated industry. There are government mandated financial consultations before taking out a reverse mortgage and other precursors to ensure that the borrower understands the ramifications of the loan.
An educated consumer is the best customer and in my opinion these regulations are extremely beneficial to the borrower.
I’m Terry, the Kabinet CPA – one of Kabinet’s goals is to help our community get the most out of their home ownership or rental journey. Feel free to reach out to us with any questions about this article!
