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Something that looks tempting to one does not necessarily mean the same to the others. The same is the story of a reverse mortgage. While it could be a great way to borrow money for some, it may seem to be a less appealing loan option for others. As for the eligibility, homeowners age 62 or above can reverse mortgage their property, irrespective of which real estate builder they bought it from. It is a way to enjoy life after retirement without being dependent on others for regular expenses. But first, it is crucial to understand the concept of a reverse mortgage and the risks and rewards that come with it. In this blog piece, we will learn who can benefit from a reverse mortgage and who cannot. Before discussing further, let us dig into what it is.
The concept of a reverse mortgage
A reverse mortgage is reverse to a home loan. What happens in the case of a home loan is you borrow money from a bank to purchase a home from a real estate developer. And in such a case, the bank holds the ownership of the property until you make full payment. For example, if you buy a property from a real estate developer in Pune or elsewhere on loan, you will get only occupancy, not ownership. The ownership will transfer as you pay off your debts over time.
The reverse mortgage is just the opposite of that. Retired individuals aged 62 or above can apply for a reverse mortgage to meet their monthly expenses, provided that they own and self-occupy a house. No matter which real estate developer or builder you bought your property from, you can reverse mortgage it to borrow money from a bank. You can use this money to supplement your income for regular expenses, meet medical emergencies, and renovate or upgrade the house. But in that case, the ownership will gradually get transferred to the bank as it pays you. The bank will pay you monthly, quarterly, half-yearly, or annually or a lump-sum amount, depending on what you opt for based on your needs. That is how a reverse mortgage works.
If the borrower moves out before repaying the loan, s/he will have a one-year window to close the loan. And if the borrower dies, the legal heir of the estate can pay back the loan with interest and get the property transferred to his name. Should the heir not be interested in the property, the bank will sell it to recover its money and transfer the excess amount to the heir.
Benefits of a reverse mortgage
- Regular income
- No dependency on children or family for regular and medical expenses
- Non-taxable payment
- Borrower and spouse can occupy the house until death, even if the tenure is over
Limitations of a reverse mortgage
- Liquidation of the property
- No payment after loan tenure is over
- Resentment of children
Who can benefit from a reverse mortgage?
Selling your property is an alternative to the reverse mortgage. But, it would require you to move, which is all the way expensive – whether you rent a property or buy a new home from a real estate builder. Plus, you would be living your life in an unfamiliar location. A reverse mortgage can benefit you if:
- Intend to stay put and can afford the taxes and maintenance on your current home.
- You are married, and your spouse is also age 62 or above. In that case, you can put both your names on the reverse mortgage. It will help you continue to receive income even if one dies.
- You do not plan to bequeath your home as part of our estate. Your children or other legal heirs can pay off the loan to keep the property, but it is often practical in most cases.
When to avoid a reverse mortgage?
- If you are considering moving out for health reasons or any other, selling your home is better than using a reverse mortgage.
- You had better avoid a reverse mortgage if you want to protect your spouse younger than 62 or other family members who live with you from losing the home after you die.
- There is an exception. If the spouse is not old enough to qualify as a co-borrower on the reverse mortgage, s/he can remain in the home after your death without paying back the loan, provided it is their primary residence. But in such a case, they won’t be able to receive any income from the reverse mortgage and will no longer be able to afford the expenses of maintaining the home, and may end up moving anyway.
A reverse mortgage is a sensible move for those who want to stay put and have spouses age 62 or older. Make sure you list your spouse as the co-borrower. But, if you plan to move and have a younger spouse, kids, and other dependents in your family, then selling your home will be more beneficial.