What Is a Reverse Mortgage Loan? Terms & Definition | Reverse Mortgage Explained
There are a lot of interesting financial products available on the market. A lot of these new financial instruments are designed for everyday consumers, but they can be more trouble than they are worth if you do not know what you are getting into.
One of these relatively new financial instruments is the reverse mortgage. So, what is a reverse mortgage?
This article will provide a clear reverse mortgage definition. We will define reverse mortgages while also touching on reverse mortgage terms and details.
Having the reverse mortgage explained in a straightforward and helpful manner will allow consumers to decide whether this product is right for them.
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A useful way to understand a reverse mortgage definition is to first understand what a regular mortgage is. Before searching, “What is reverse mortgage?” consider the financial instrument it is supposed to be the opposite of: regular mortgages.
How can we answer the question, “What is a reverse mortgage?” by learning about a regular mortgage? A mortgage is a debt instrument, which is a financial commitment to pay back a lender.
It carries specific terms and conditions, including the amount of interest to be paid and the repayment timeline. Your mortgage is securitized or backed by the home that you purchase with it.
Mortgages provide people the opportunity to own a home without having the entire amount necessary to pay the developer or previous owner.
In short, it’s a loan that allows you to have the title to the home, but that also allows the bank to use it as collateral if you are unable to make your monthly mortgage payments.
What Do Regular Mortgages Have To Do With The Question, “What Is a Reverse Mortgage?”
But what is a reverse mortgage loan, and what does this have to do with a regular mortgage? What are reverse mortgages, and how do they relate to the routine mortgages most Americans are familiar with?
When you buy a home, you have the title, which means you can sell it, make changes to it, or rent it out – you are the owner.
That said, the bank that provides your mortgage has a stake in your home as security, should you default on your loan. The amount of money you have paid down on that original loan balance is the amount of equity you have in the place.
Naturally, the larger your down payment, the more equity you start off with. Normally, people have a smaller amount of equity in their home closer to the start of their home ownership because most of the home has been paid for using the bank’s loan with the down payment contributing a certain percentage.
The more equity you have in your home, the less you owe the bank – reverse mortgage terms allow homeowners in this situation to benefit.
A definition of reverse mortgages is essentially this: a reverse mortgage is a financial product that allows you to borrow money against the equity in your home. You do not have to pay this loan (aside from your payments related to ownership like property taxes and insurance) until you sell the home or die.
What Is a Reverse Mortgage? | The Appeal of Reverse Mortgages
Reverse mortgages explained in terms of demographics help people understand their appeal a little better. You need to be 62 years old or older to get a reverse mortgage, in addition to other requirements.
Retirees strapped for cash, especially after the Great Recession, often turn to reverse mortgages as a “loan of last resort,” according to CNBC.
What are reverse mortgage loans’ history, and how long have they been around? They have existed as a part of the mortgage market since the 1980s, but have only increased in popularity in the last decade.
They are an attractive solution for retirees or soon-to-be retirees who did not save up enough money to live comfortably in retirement.
What is a reverse mortgage, and what does it mean for people in this situation? It is a way for them to get relatively easy access to cash in retirement.
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Many people approaching retirement mistakenly think that their Social Security benefits will be enough to allow them to live comfortably in retirement.
This is not realistic. In fact, Social Security is meant to supplement income from other sources, like a retirement savings fund built through savings and investments over the course of one’s life. A reverse mortgage definition would certainly incorporate this use of reverse mortgages as fast cash for cash-strapped retirees.
So then, what is a reverse mortgage? You are using the money you already paid out, so is it like a free loan? Not quite, and that’s a very dangerous way to think. Keep in mind that when you are paying off your mortgage, you are paying off a loan for something you have already bought: your house.
If you decide to use the equity you have built up, you are simply borrowing the money you used to pay the initial amount you borrowed. And when you borrow money, there is always interest involved.
Your reverse mortgage definition should recognize the fact that there will be interest that needs to be paid for this amount. Once the terms of your reverse mortgage have been agreed upon, you can receive your reverse mortgage either as monthly payments, a lump sum, as a line of credit, or as a combination of all three.
What Is a Reverse Mortgage’s Pros?
What is a reverse mortgage’s benefits? Like any financial product, there are pros and cons, and some options make more sense than others. The reverse mortgage definition includes a number of pros that many eligible individuals may find attractive for their particular situation.
Reverse Mortgage Definition: Pros
- Reverse mortgages mean that you do not pay the lender. The lender pays you, the borrower. This reverse mortgage definition sounds very attractive, because paying back this loan you take out using your equity is something you do not have to think about until you move, sell, or pass away.
- You can use your biggest asset for cash when you are older and cash-strapped. Saving for retirement starting from when you are young is one of the most popular pieces of financial advice. Social Security is not enough to live on, especially if you enjoyed a certain standard of living while you were working. In a lot of cases, those who failed to save for retirement have access to one huge asset: their home. Most likely, they have contributed to it significantly over the years through mortgage payments. In this case, what is a reverse mortgage if not a way to access the equity on your home without having to sell?
- Income from a reverse mortgage is not taxed. What is a reverse mortgage’s tax status? When you receive monthly payments, a lump sum, or access a line of credit tied to a reverse mortgage, that income is not taxed by the Internal Revenue Service. Technically, the IRS does not consider money received from a reverse mortgage as income. They classify it as loan proceeds, instead.
- You can continue to live in your home. So long as you meet the reverse mortgage terms, you can live in your home as long as you want. This is a particularly attractive feature for seniors who need money but do not want to leave the home they have lived in for their entire lives.
Common reverse mortgage terms include paying any other fees associated with the house, such as property taxes or home insurance. Additionally, the owner must keep the home in a good state in order to protect its value. The lender makes their money back by selling the home; naturally, they do not want poor maintenance to affect their ability to recoup the loan amount later.
- You keep the title to your home. You remain the owner of your home and can decide to keep or sell it whenever you like. So long as you do not violate the reverse mortgage terms (which may require that you live in the home) you keep the title.
Reverse Mortgage Definition: Cons
- You need enough equity in your home. Even if you are the qualifying age, as part of the reverse mortgage terms or prerequisites, you must have enough equity built up in your home. If you over 62 years of age but have not paid off enough of your home, you will have difficulty obtaining a reverse mortgage. Part of the reverse mortgage definition is having enough equity, and this is a disqualifying factor for many.
- It has to be your primary residence. What is a reverse mortgage’s usefulness to those with investment properties or vacation homes? Not much, unless they plan on getting a reverse mortgage on their primary residence. Part of the reverse mortgage definition and the reverse mortgage terms is the stipulation that you must be getting the reverse mortgage for your primary residence. You cannot get a reverse mortgage on your vacation home, secondary home, or investment properties.
- You are responsible for all the other financial obligations that come with owning your home. What is a reverse mortgage’s effect on your other financial obligations tied to home ownership? Nothing liberating. An important part of the reverse mortgage terms is that you are still required to keep the house in good repair, pay property taxes, and any other home owner’s insurance.
- There are costs involved with the process. What is a reverse mortgage’s costs? Getting a reverse mortgage can be easy if you meet the qualifications, but just because it’s easy doesn’t mean it’s cheap. What are reverse mortgages going for these days? That can vary, but the cost can include an appraisal fee, title insurance fee, a loan origination fee, mortgage insurance fee, or more. This cost is typically absorbed by the loan so that you are not required to pay for it up front, but keep in mind that you will still eventually be paying for it (if you move, sell, or violate the reverse mortgage terms).
Reverse Mortgage Definition for Those Who Have an Existing Mortgage
If you have an existing mortgage, you can still qualify for a reverse mortgage, but you will be required to pay off the existing mortgage.
As explained by the National Reverse Mortgage Lenders Association, if you owe $100,000 on an existing mortgage, and qualify for a $125,000 reverse mortgage loan, you must that money to pay off the $100,000 balance and then you can use the leftover money ($25,000, in this example) however you like.
Remember: one of the reverse mortgage terms is that you pay things like property taxes and insurance, so evaluate your situation to ensure that you can handle those costs after the fact.
What Is a Reverse Mortgage’s Medical Requirements and Impact on Government Assistance?
There are no medical requirements to qualify for a reverse mortgage. The only thing that you will personally be checked for (aside from an appraisal of the property) is your financial ability to pay the fees associated with your home.
The key takeaway from the reverse mortgage definition is its reliance on your home equity. The loan will eventually be paid back by the selling of your home when you move, downsize, or pass away.
Additionally, you do not lose any Social Security benefits or government assistance from receiving a reverse mortgage loan.
What Is a Reverse Mortgage vs Home Equity Loan?
What is a reverse mortgage’s relationship to a home equity loan? You have probably heard of home equity loans more frequently than you have heard of a reverse mortgage definition. Home equity loans are a more popular method for getting a loan against your home. They are commonly referred to as “second mortgages.”
The biggest difference between these two is that your home remains your asset when you get a home equity loan.
What is a reverse mortgage’s impact on the status of your home ownership? You can still live in the home, and you hold onto the title, but the lender has the power to sell the home if you violate the terms of your loan.
As a result, there is a lien on your home until that reverse mortgage has been paid back. In ideal circumstances, especially for retirees looking to live out the rest of their years in their home, this is not something they have to think about, since this will be settled after their death when the home is sold to recoup the costs.
For a home equity loan, you are borrowing money against the value of your house, but you have the option of renting it out, taking out a home equity loan on a vacation property, using it as an investment property, and more.
It is still an asset that belongs to you and that you can leverage at your convenience.
In recent years, federal regulators have worked to tighten the rules surrounding reverse mortgages to protect consumers, particularly vulnerable seniors.
The reverse mortgage definition is a good one to know if you are considering your retirement options, but be sure to consider a range of financial options to ensure that you are doing what’s affordable and best for you.
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