You've worked hard over the years to keep your home, but if you still owe money on that house, retirement may not be within your reach unless you sell the home, or take out a reverse mortgage. A reverse mortgage works by providing you with some of the equity in your home, with no required monthly payments. But at some point the loan does need to be paid back. This guide explains when a reverse mortgage loan is paid back, so that you and your financial planner can determine whether this is a viable option for you.
Payment Is Expected in One Lump Sum
Since there is no monthly mortgage payment required from you, the reverse mortgage loan is due and payable upon your death. Your heirs are responsible for this payment. While this may be somewhat scary to you and your heirs, a simple phone call to the servicer of the loan is necessary to work out how the loan is to be paid back. Often, your heirs can sell the property to settle the debt. They keep any monies that are left over.
Payment Expected If You Sell the Home or Move for One Year
The purpose of a reverse mortgage is to provide you with a monthly income stream from the equity in your home, so that you can stay in your home. However, should you decide to move, or stay away from the home for more than a year, the amount of the loan is due in full.
One benefit of a reverse mortgage is that if you move, and sell the home, the bank gives you the difference in the loan amount and the remaining equity. So, you could borrow only a portion of the equity and save the rest for when you sell the home.
Payment Expected If You Default on Property Taxes or Insurance
Pay your property taxes on time and keep the home insured, according your particular state's regulations. Should you fall behind on these payments, the reverse mortgage lender could call the loan and expect payment in full.
While taking out a reverse mortgage can help you get to the point where you can retire much quicker than expected, discuss this option in detail with your financial planner or someone from a place like Duff & Associates. If you decide to go with this option, let your kids know so that they will know what to expect in the event of your demise. The more you know about how this type of a loan works, the better able you'll be to determine whether this is an option for you.