Appealing to many people when they reach the age of retirement, reverse mortgages offer the older generation of homeowners a steady income by allowing them to borrow money against the value of their home.
What is a Reverse Mortgage?
A reverse mortgage essentially operates in reverse to a traditional mortgage, whereby a loan is taken out against the equity already accumulated on a property, though the borrower does not have to make any repayments and still retains full ownership of the house. Specifically for senior citizens as a retirement plan option, a reverse mortgage lender will instead simply pay the borrower their loan in one lump sum, as a monthly income, or as a credit line that gives freedom to decide how much they want and when.
Reverse mortgage loans are only repaid in full when the last living homeowner sells the house, moves away, or dies.
Reverse Mortgages Explained
Because no monthly payments are made with a reverse mortgage, the amount a borrower owes grows larger over time, which is the main reason why banks, building societies and other lenders offer such a financial product. Though, by law, a homeowner can never owe more than their home’s market value at the time the loan is repaid, lessoning the risk factor associated with reverse mortgages.
These types of mortgages are generally only available to people over 62 years of age who live in their house most of the year, and who either own their home outright or only owe a small amount on an existing mortgage that can be paid off with the proceeds from a reverse mortgage. Typically, the highest loan amounts go to the more elderly homeowners living in the most expensive homes. Other than that, reverse mortgages are extensively available via mortgage brokers and lenders, as a good credit rating is an irrelevant factor when a lender assesses eligibility for a loan. This is not the case with remortgaging, which is a reason for some older home owners to prefer reverse mortgages.
Some reverse mortgage lenders offer homeowners this mortgage for a specified purpose, such as paying for home repairs or property taxes, or for debt consolidation, though a reverse mortgage lender will generally offer one for any purpose. Reverse mortgage interest rates set by lenders are often higher than those with standard mortgages because of the benefits associated with these types of mortgages, namely due to them being a substantial source of funding without monthly payments.
Disadvantages of Reverse Mortgages
Despite these benefits, there are also many disadvantages that need to be taken into account by homeowners considering reverse mortgages. A reverse mortgage will usually entail high upfront mortgage fees which may be unaffordable to older people. Application fees, monthly service fees and closing costs usually become part of the initial loan balance and accrue interest, resulting in much higher costs compared with more traditional mortgages.
Therefore, careful consideration should be taken before applying for a reverse mortgage, even if the benefits of a reverse mortgage appear in principle to outweigh the costs. A reverse mortgage calculator is a useful tool to assess whether the additional costs involved can be afforded, particularly if the borrower is deciding upon a reverse mortgage for their retirement plan.