A mortgage is something we’ve all heard of at least once in our lives. A mortgage is when you give the possession of one of your belongings (mostly house) to the bank or a money lender in exchange for money and as you pay back the loan, you get back the possession. Well, have you heard of reverse mortgages! It is one of the most common loans primarily popular amongst old individuals. There are several benefits of reverse mortgage loans that we shall be discussing in this article but before that, let’s understand what reverse mortgage means.
What is a reverse mortgage?
A reverse mortgage is a concept that has been introduced primarily for the older individuals of society. It implies those that are above 60 years of age and own a house. If for any purpose they require money, there are a lot of ways to do it. One such way is a reverse mortgage.
According to this scheme, they write their will (the possession of their house) in the name of the bank that they are taking a loan from. The bank lends them money in return for their house’s possession. The person seeking the loan is allowed to live in the house as long as they can. As per the present norms, only 60% of the total price of the house is given to the old city.
The scheme is valid for only 10 years. If in case the individual outlives these 10 years, they are allowed to live in the house but won’t be given money anymore. If the individual dies before 10 years, the bank sells the house. The profit earned from the sale is given to the biological heir of the individual. The heir is required to pay due taxes for the capital received.
Benefits of Reverse Mortgage:
You live in your house as long as you live:
The best part about this scheme is its flexibility and how it takes complete care of the comfort of the older members buying it. The scheme is applicable for 10 years. The bank pays you installments of your money for 10 years. But even after those 10 years, you’re allowed to live in your house. The bank cannot possess or sell the house unless the owner is dead. In most cases, no extra money is charged by the bank for living in your own house.
No money to invest:
For an old couple who has their children well settled and in no need of their parental house, this scheme is perfect. If they find a shortage of money, they do not have to depend on their children to send them money for their monthly expenditure. Instead, they just need to sign a will that allows the bank they choose to take possession of their house after they die. The bank will give them 60% of the cost of their house in installments for ten years.
If the house sells for more price:
The reverse mortgage scheme is controlled by the federal/central government. This makes it more stable and more secure. If in case after the death of the owner, the bank sells the house for a higher price than the capital that was decided with the individual (dead), the central government shall make sure that all the profit earned shall be passed on to the biological heir of the dead individual. Although, the inheritor of the money will have to pay the due taxes imposed on the capital earned.
If the house sells for less:
Does not matter if the house sells for more or less price, the scheme is not subjected to market risks since the central/federal government has you covered up. If the house sells for a Lesser price than was discussed with the owner of the house, the bank does not suffer a loss and the bank does not trouble the biological heirs of the owner of the house. The central government takes care of everything and compensates for the loss in several ways. It could cut down on the taxes imposed or find another way to cut down the loss of the bank.
Mode of payment:
The individual seeking and opting for a reverse mortgage might need it for different purposes. Thus the needs of everyone in terms of receiving the money could be different. Some might like it monthly, while some might like it paid annually. Depending upon the needs of the clients, the disbursement is planned differently.
Different banks offer different interest rates and different schemes. Thus before buying a reverse mortgage loan, one must make sure they check on the various options available and then choose the one that suits their needs and comfort the best.
Interest adds to the amount:
When you take a loan from a bank and pay the money back in installments. You are required to pay a bit more than you were lent. Similarly, when the bank pays you your money in installments, interest is applied to it based on the agreement. So as time passes, the amount that the bank needs to pay you increases as the interest money increases. Therefore, you do not need to worry about the money, you’ll always remain at profit.
Variable interest rates:
The interest rates applied to these schemes are variable. It depends upon the market and the financial index. The interest rates could decrease as well as increase. In both cases, you shall receive more than the amount that was due to be paid. If you fear the fluctuating rates of interest and seek something more stable, you could opt for HECMs. These reverse mortgage schemes offer fixed interest rates that do not change with the financial index or with the market.
If the spouse disagrees:
In some cases, the spouse of the individual signing for the scheme disagrees with the scheme and refuses to sign the papers. Under such conditions, when the individual dies, the bank will stop paying the money to the spouse. However, they shall be allowed to live in the house for as long as they live. They will have to pay all the bills and the maintenance charges of the house on their own. If your spouse wishes to reclaim the house, they can do that too, by repaying the money that has been taken. So even if your spouse does not agree to the scheme, you can take the call.
The benefit of heirs:
The question mostly arises, what does a person leave for their heirs. Well, a person dies within the duration of the scheme, the remaining money, after deducting some amount, is passed on to the heirs by most banks, in most conditions. Also, if the house is sold at a higher price, the profit is deposited in the account of their biological heir.
If an heir wants the house:
If in case, the heir wishes to claim the house after the death of his parents, they can claim it by paying the loan. The good part here is that the heir does not have to pay the current value of the house to buy it, they just need to pay the amount that was decided when the scheme was signed. The bank does not charge any extra money than the original cost of the house at the time of agreement.
The government also has several of its schemes running to help the elderly citizens of the country. Thus one should be well aware of these schemes to enjoy the benefits.
Conclusion:
A reverse mortgage is a scheme available for individuals more than 60 years of age. If they own a house and are unable to meet their financial needs, they can sign a will and give the possession of their house to their bank. They can live in their house for as long as they survive and the bank shall pay them the 60% cost of their house in installments for about 10 years (or more, depending upon the scheme). There are several benefits of this scheme.
If you outlive the period agreed by the bank, you will still be allowed to live in the house but they will stop paying you the money. You do not need to pay any money to the bank, instead, they pay you the money. These schemes are controlled by the federal/central government. So, if the house sells for more than the price agreed, the profit is given to the biological heirs of the old couple/individual. While, if it sells for a lesser price, the loss is covered by the government.
The individual or couple could choose if they need the installments to be paid monthly or annually. The interest keeps adding to the capital therefore, one always owns more than one decided. If the biological heir of the individual wishes to buy the house, they just need to pay the amount of money that was decided as the original price for the house and not the current price.