Things You May Not Know about a Reverse Mortgage

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Author: Leslie Silver

You hear a lot about reverse mortgages these days, especially in terms of how this type of loan arrangement can make retirement much easier financially. There are in fact a number of benefits associated with entering into this type of loan situation. However, before you start looking for a lender to process a reverse mortgage, here are some things about reverse mortgages that you may not know.

First, there are several basic requirements that you must meet in order to qualify for a reverse mortgage. One has to do with your age. Unless you are currently sixty-two or older, you will not be able to obtain this type of loan. In fact, some lenders will not underwrite a reverse mortgage unless you are officially retired, and over sixty-two.

Another thing you may not know about reverse mortgages is that you must own your own home free and clear in order to obtain a loan of this type. That means there cannot be an outstanding mortgage on the property, and the home cannot currently be designated as collateral on any other type of loan. Lenders want to have easy access to the home in the event you default on the reverse mortgage at some future point. Unless they have this access from the very beginning, few lenders will be willing to assume the risk and extend the loan to you.

Some lenders also have requirements about the type of dwelling that can be used as collateral for a reverse mortgage. For example, some lenders only consider property that is a single residence. However, there are lenders who will consider arranging a loan involving a duplex or even a quadraplex, if the recipient of the loan resides full time in one of the units. Talk with lenders in your area to determine if your home qualifies before spending a lot of time on making a formal application.

Not everyone understands that several criteria are involved in determining the amount you can receive from a reverse mortgage. Your age is one consideration, as well as the prevailing interest rate at the time you make the application. The current market appraisal of the value of your home will also play a significant role in how much you can receive from the loan arrangement. Last, mortgage limits that are imposed for the area where your home is located will also be taken into consideration. That means that even though your home may be in excellent condition, the fact that it is located in what is considered a high-risk neighborhood will have an impact on the total of the loan.

You may not be aware that there are several ways to receive the proceeds from a reverse mortgage. Just about everyone knows it is possible to set up a schedule of regular monthly disbursements that can be used to manage day to day needs, or in any other manner you like. However, it is also possible to establish a line of credit with the lender. This is often a good approach if you want to be able to draw on your home’s equity in the event of some type of emergency, such as an extended hospital stay.

There is also the option of receiving all the loan proceeds in one lump sum. Unless there are extremely unusual circumstances, this is often not the recommended approach. However, if you need a large sum of money, this may be your best option. Since you do not have to begin repaying the loan as long as you live on the property, there is time to begin paying down the debt after the crisis has passed, with the payments being any amount and on any schedule you choose.

However, be aware that any amount you’ve received from a reverse mortgage is subject to the accrual of interest. This is one reason that many people choose to go with the line of credit option, then repay the amount borrowed on the credit line as soon as possible. Typically, the interest rate on loans of this type is higher than on other loans. Keep that factor in mind as you investigate the possibility of applying for a reverse mortgage.

As with any type of financial arrangement, it is important that you learn everything you can about reverse mortgages before deciding that this type of arrangement is for you. Talk with others who have chosen to go with a loan of this kind, and ask them pointed questions about their experience. Also obtain feedback from several lenders, and compare their answers. Doing so will make it much easier for you to make an informed decision, and hopefully be very happy with your choice.

Leslie Silver is a freelance writer who writes about reverse mortgages and how to refinance.