A reverse mortgage is a loan from the U.S. Government for 50% to 75% of the value of a home owned by a homeowner aged 62 and older. Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to the homeowner. The funds from a reverse mortgage are tax-free. The loan doesn't have to be repaid in the homeowner's lifetime, however, when the homeowner dies, the money received plus approximately 4% interest is repaid by their estate. The loan is repaid when the homeowner ceases to occupy the home as a principal residence, due to the homeowner (the last remaining spouse, in cases of couples) passing away, selling the home, or permanently moving out.
Vermont Home Equity Conversion Mortgage - Reverse Mortgage
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Another refinancing option is to refinance the reverse mortgage into a conventional loan. The loan will pay off your reverse mortgage and you'll go back to making monthly mortgage payments.
The downside of a reverse mortgage can be that the closing costs can be higher than a traditional loan, the property must be your primary residence, the loan is not assumable, and there may be less equity to leave to your heir as an inheritance.
A reverse mortgage increases your debt and can use up your equity. While the amount is based on your equity, you're still borrowing the money and paying the lender a fee and interest. Your debt keeps going up (and your equity keeps going down) because interest is added to your balance every month.
The interest rate on a reverse mortgage is usually higher than on a home equity line of credit. Be sure to compare solutions. Interest rates may increase or decrease over time. Since you aren't required to repay the loan before the maturity date, interest keeps accruing and can end up being a significant cost.
Generally speaking, you can usually get somewhere between 40% to 60% of your home's appraised value. And the higher your home value is, the more money you can potentially access.
If you're a homeowner age 62 or older, a reverse mortgage can help you obtain tax-free income based on the equity in your home. A reverse mortgage might give you more flexibility in retirement and allow you to stay in your home.
Whether you have a conventional or reverse mortgage, you always risk losing your home if you don't meet loan obligations. With a traditional mortgage, the typical way that a borrower defaults on the loan is if they don't make monthly payments.
Repayment for a home equity loan is like your original mortgage: you borrow the money and start repaying the loan through monthly payments. On the opposite end, reverse mortgage balances aren't due unless the borrower dies, moves or sells the house. If the borrower passes away, heirs are responsible for repayment.
