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A reverse mortgage is a term used to describe accessing the equity in your home for cash. It is a finance tool available to seniors in the US, Canada and Europe. This type of mortgages qualification rules are based on the age of the homeowner and assume full ownership of the property.
Equity is the difference between the market value of a property and the amount owed. This equity is usually realized when the property is sold and the funds dispersed. Only at this point do you have access to the cash value of equity in your home.
A regular mortgage is a financial debt instrument used by financial institutions to describe a loan over a long period of time, based on the current value of an asset or property, such as a home or cottage. Once the mortgage is paid off, the homeowners own the title to their property
The reverse mortgage allows the homeowner to access the equity in their home while still living in it, with no monthly mortgage payment. The mortgage payment is deferred until the owner dies, the property is sold, or the owner moves. The amount owed is deducted from the sale of the house, before it is paid to the estate.
A reverse mortgage is advisable for people who have retired, or are in need of additional cash flow to meet their living expenses, but have no means of generating income. In order to qualify for a reverse mortgage, certain criteria must be met. The minimum age of the property owner must be 61 in the US, 60 in Canada, 50 in Europe and have no other mortgage on the property.
There are strict laws surrounding reverse mortgages, to ensure that senior citizens are not tricked into accessing the entire equity in their home, and then being forced to move out. A reverse mortgage cannot be for more than 40% of the equity in the home.
The payment is made to the person living in the home and the home is subject to inspections to ensure it is in good repair. Insurance and property taxes must be up to date. Any lapses can violate the agreement and cause the bank to call in the mortgage.
Talk with the beneficiaries of your will when thinking about a reverse mortgage. The amount of their inheritance is reduced by the amount owed to the bank for the mortgage payments, as well as the amount deducted from the home.
They may be able to provide other financial arrangements that have a more favorable interest rate or tax treatment. Other options include an intra-family loan or lease back; where the property is "sold" within the immediate family and the proceeds provide the necessary funds.
When thinking about a reverse mortgage, ask about any additional fees. In the US, 2% of the value is charge in insurance and there is a 2% origination fee, which are deducted from the mortgage payout amount. In Canada and Europe, there are application fees, lawyer fees and bank fees. There are also closing costs associated with a mortgage, which include title searches, registering the lien, etc.
Check for any service costs or fees that are added to the reverse mortgage, including monthly fees to maintain the account. A reverse mortgage typically has quite high fees and service costs. Although these costs can be paid out of the loan itself, interest is calculated and paid out on these additional costs.
The interest rate on a reverse mortgage should be less that a conventional mortgage, as it is completely asset backed, with a guaranteed payout. In the US, the funds derived from a reverse mortgage are not considered income for tax purposes. However, the interest costs from the mortgage payment cannot be deducted until the house is sold, which is the point when the actual interest payment is calculated and deducted from the value of the home.
It is not a good idea to have only one spouse named in the reverse home mortgage. That action, of just one spouse being named on the mortgage puts the other spouse at a high risk of potentially being homeless at some point.
If the spouse named on the mortgage dies it would be tough luck for the surviving spouse. The surviving spouse would have to pay the loan in full if she wanted to continue living in it.
The appraised value of the home would have nothing to do with it. So even if appraisal would be lower than the loan, the loan would have to be paid in full.
Obviously this would not be a sound decision. It definitely merits having both spouses named on a senior reverse mortgage.
Thank you for your posting. While a quitclaim will remove your wife from the mortgage, there is a serious downside to this. Should you pass away or become ill before she does, the property does not pass onto her. Instead, it would be sold immediately and the proceeds provided to the bank to cover the reverse mortgage costs. Any remaining funds would go to your estate, which can then be distributed in accordance with your will. During the interim, your wife would have to locate a new home. Keep in mind that statistically, woman outlive men.
The alternative method of freeing up the cash in your home equity is to apply for a line of credit or personal loan, secured by your home. This method provides you with improved cash access, but will require monthly payments to repay the loan.
I am 62+, my wife is 55. It is our understanding that both of us have to be at least 62 in order to qualify for a reverse mortgage. Is there any way around this? We've heard that a quitclaim deed may be used to take my wife off the mortgage, but what would be the ramifications of doing this, and are there any other solutions?
Thanks in advance