What you need to know about Reverse Loans

Days blended into weeks into months, and before I realized it, it is September. Hi, folks, how are you? 

I spent the past few months paying off my home loan to Tom Nook and prettifying my island Soliantu. I am talking, of course, about Animal Crossing: New Horizons. My boyfriend gave me a yellow Switch Lite and a copy of the game on our fifth anniversary and it made coping with this pandemic much more bearable.

In more personal, serious news, we purchased a lot IRL. We are going to build a house on it in two years' time, and I am very excited!

Are you looking into properties too and wondering about the different jargons involved? Well I have an article here that might be helpful if you are just starting to research whether a reverse mortgage is right for you. Whether you’re close to going ahead with a final decision or not, some of the terminology involved in the process can be a little daunting. In this article, some key terms are explained more clearly. As you know, it is essential to understand everything in detail in order to know what you’re taking on.

What’s the difference with a reverse mortgage?

Reverse mortgages are specific loans that enable people 62 and older to take out a loan against the equity of their home during retirement. The big difference with this type of loan is that the borrower does not make a monthly payment; instead, they are simply responsible for paying taxes on their home, taking out property insurance, and managing repairs and maintenance. The essence of reverse mortgages is that they enable the borrower to continue to live in their home, but freeing up some precious cash for their retirement years.

Make your calculation

Reverse mortgage calculators provide borrowers with an outline of the setup fees, interest and loan terms they will be bound to if they go ahead with this type of mortgage. The calculator also establishes the applicant’s eligibility, and assesses the value of the property. From this, it is possible to see how much cash will be made available for your retirement.

What about Proprietary Reverse Mortgages

In simple terms, PRMs are private lenders that do not come with the assurance of the Home Equity Conversion Mortgages. With this assurance, borrowers are covered by FHA insurance to protect their mortgage. That said, both types of loan are fully regulated in terms of how much can be borrowed, as well as how much can be borrowed.

Other options

Another benefit of a reverse mortgage is how you receive the proceeds (i.e. the difference between your mortgage equity, and your house value). It’s possible to receive the payment as a one-off lump sum. Alternatively, you can access the funds at your convenience as a credit line from the bank as and when you need it. Lastly, perhaps the most popular option is receiving the funds by way of a regular monthly direct debit into your bank account, while the rest of the money stays available for drawing down as required.

D-Day

Default on reverse loans is a very different situation than the worst-case scenario if a standard mortgage is defaulted. In traditional mortgages, default often leads to the borrower being forced to leave their home. But defaulting on reverse mortgages is different, since the borrower does not make monthly payments. In this scenario, you have nothing to pay on a regular basis, and the balance of the reverse mortgage is only payable as a result of your death or if you decide to sell up your property. The only financial obligations the borrower has are to maintain and improve the property as they see fit, insure it, and pay the appropriate taxes on it. Everything else is taken care of, and the idea is that the remaining finance that is made available is then yours to spend, and enjoy, as you please in your twilight years.