What is a reverse mortgage? Are you, by chance, trying to understand a reverse mortgage? If yes, this article has the information you are looking for.
Reverse mortgages can be greatly helpful to senior citizens looking for post-retirement income.
Go through this article to find out what a reverse mortgage loan is and how it helps borrowers.
What Is A Reverse Mortgage And How Does It Work?
A reverse mortgage is a financial vehicle designed to help senior citizens over 60. The Reverse mortgage mechanism allows the citizens to use their residential property as collateral and take a loan against it. One must remember that this loan is not similar to a loan against property. The borrower will receive the amount in monthly installments.
Want to have a better understanding of how it works? Well, here is the process through an example. Let’s say you have a residential property that you can use as collateral to take a loan against it. So, when you apply for a reverse mortgage loan, the bank will send a valuator to evaluate the house’s value.
Once the bank determines the value of your house through the valuator, they will start the process of providing you the loan using the property as the collateral. Usually, a borrower gets 80% of the estimated value of their residential property under the reverse mortgage loan. Here is a simple process of how you get the amount – if the house is worth 1 Cr, the bank will provide you with 80% of that amount, which is 80 lakhs.
Unlike loans against property, reverse mortgage loans do not provide the loan amount in a lump sum. The borrower gets the entire loan amount bit by bit every month.
Who Is Eligible For A Reverse Mortgage Loan?
Now that you know about this financial product, it is important to know whether you are eligible to apply for it. Typically, a reverse mortgage loan is designed for senior citizens who have a residential property they can use to supplement their income after retirement.
Aside from the different criteria for a reverse mortgage loan, individual banks also have their own rules and criteria applicants have to follow. Here are some of the critical eligibility areas you must remember.
- You must be at least 60 years old or a senior citizen. But if the applicant has a joint account with their spouse, the spouse must be at least 55 years old. The minimum age requirement for the reverse mortgage loan is 60 years. However, there is no higher age limit for applying for this loan.
- An applicant needs to have a residential property with no loans or debts attached to it.
- The property you use as collateral for getting the loan must be your primary residential property for at least the past year.
Aside from the different criteria mentioned here, some additional criteria must be fulfilled. For example, condition of a property, maximum loan amount, etc.
What Are The Benefits Of Getting Reverse Mortgage Loan?
If you have a clear understanding of what reverse mortgage loans are, let’s understand what benefits they bring to the borrower –
No Need To Repay The Loan
There is no need to repay a reverse mortgage loan. Some only want to repay the reverse mortgage loan to retain their property. If a senior citizen takes a reverse mortgage loan to supplement their post-retirement income, repayment is unnecessary.
No Need To Vacate The Property
Also, the borrowers do not have to vacate the property once they stop receiving the installments. But, if they want to sell the property, move out, or die, the bank assumes control. But, if the borrowers want, they can continue to live in the property.
Capital Gain And Income Tax Deferred Payouts
The monthly installments you receive for the loan applied do not come with any tax liabilities. Your monthly payouts do not involve any tax liabilities.
Flexible Use Cases Of The Payouts
You do not have your hands tied as to how you want to use the money received from the reverse mortgage loans. You can use it to maintain your living expenses, renovate your property, or extend it. How you use the amount gained from the loan is completely up to you.
Option To Retain Ownership
A borrower can use their property as collateral and get the loan amount they want. Once the owner dies, they can pass the property on to the next keen. Since the bank has the right to take ownership of the house and sell it to get the funds they lent, they can rightfully do so. However, the property owner can leave the property to their keen. In that case, the keen need to repay the debt to retain ownership.
What Are The Limitations Of Reverse Mortgage Loan?
Yes, the reverse mortgage loan has some benefits. But it is not free from its drawbacks. Here are a few drawbacks you must keep in mind –
No Lump Sum Payment Option
If you want to get the amount paid in a lump sum, there is no clear option. The maximum average amount you can get is 50% of the complete loan eligible according to the property value. Also, you have to accept the payment on a monthly installment basis.
Owner Is Liable For Maintenance
The owner still owns the property and not the bank. So, if the property needs renovation or maintenance, the owner is liable for that.
If the owner wants to make any changes to the property, they need to discuss that with the lender and get their approval. Even though the owner owns the property, they do not have the right to change it on their own accord.
How Do You Pay Back A Reverse Mortgage?
The borrowers can sell the house and use the proceeds for the reverse mortgage loan repayment. If a borrower or their kin plans to retain the property and repay the loan, they can do so. However, in that case, they must follow the process mentioned here –
- Refinancing the mortgages
- Taking a new mortgage
- Making monthly payments
Final Words
Reverse mortgage loans usually only concern senior citizens who do not have an income to carry out their living expenses. In that case, they can use their property as collateral and take a loan to get by. Thousands of senior citizens suffer from a lack of post-retirement income. But, if they have property, they can use it to finance their regular expenses like medical care.
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