Many people are still not clear about what a reverse mortgage is and how it works. As its name suggests, this financial instrument is the opposite of the traditional mortgage. In other words, in this type of financial operation, the bank pays you a monthly rent with the guarantee of your home. It is a good option to reactivate your economy enjoying the value of your home, without having to sell it and give up ownership and enjoy it.
As with any financial tool, it brings with it advantages and disadvantages, everything will depend on the needs and characteristics of each borrower. The reverse mortgage was created to be applied as help to elderly people who are alone. Many times they have their own home, but they lack a good income that guarantees their well-being until the last days of their lives. With this financial instrument, they can receive an income and live in peace, since the mortgage will only be executed once the contracting party dies.
What is a reverse mortgage?
The reverse mortgage is a financial resource created by banking and credit institutions. It is aimed primarily at elderly people who own real estate assets and want an additional pension. It is a mortgage loan in which the financial entity, after satisfying certain requirements by the owner and appraisal of the property, pays a certain amount of money as monthly rent to the client who offers his house as collateral in exchange for the loan.
In this type of financial operation, the owner receives the money set according to the percentage established on the appraisal. Without losing ownership and use of your home until the day of his death. It is then that the financial institution takes control over the ownership of the asset. This occurs as long as the heirs, if any, decide not to assume the responsibility of paying the credit granted. Therefore, it works in reverse to a normal mortgage, hence its name.
How does a reverse mortgage work?
The operation of this financial tool known as a reverse mortgage is simple. Unlike a traditional mortgage, where the owner pays the bank for homeownership, it is the bank that pays the owner money for the value of the property. In this way, the owner belonging to the elderly will be able to dispose of his capital represented in the real estate asset and convert it into a liquid asset in the form of monthly income.
The types of mortgage that provide an income to the owner can be:
- Temporary reverse mortgage: the value of the home is divided into the number of installments corresponding to the time stipulated in the contract.
- Reverse life mortgage: guarantees a monthly income for life to the holder and has a life annuity insurance that is activated if the amount delivered exceeds the value of the mortgage.
- Single disposition reverse mortgage: the total value of the mortgage is paid in a single payment at the beginning of the contract.
What requirements are needed to request it?
The requirements to acquire a reverse mortgage, in general terms, will depend on the conditions imposed by each financial institution. However, these should not exceed in any way the law 41/2007.
These requirements are :
- The age of the beneficiary or beneficiaries cannot be less than 65 years, unless they have a disability equal to or greater than 33% or if they are a dependent person and own a home.
- You must own the home with no outstanding active debt, in which case it must be paid in full.
- The mortgage is on the applicant’s main home and must be fully insured against damage. At this point, we must clarify that it can also be done on second homes, although the tax benefits are lost.
- You must have your respective appraisal and valuation carried out by an appraisal company.
- Be able to make timely and full payments of ongoing property charges. For example, property taxes, insurance, or homeowners association fees, among others.
Advantages of the reverse mortgage
There are many advantages that reverse mortgages can offer. Without a doubt, the greatest advantage is in the fact of providing a secondary income to the elderly without losing the property and the enjoyment of the house. In addition, the requirements to obtain it are much more flexible than for a normal mortgage. It is known that at a certain age it is very difficult to obtain credit. The only income that the beneficiary must demonstrate is that necessary to cover the expenses of the property.
In addition, it is also a great advantage that the income received is not considered as income, so it is totally exempt from personal income tax and the Documented Legal Acts tax. The latter, only in the case of the habitual residence. In addition, the borrower does not have to worry about paying the money or losing his house, since the mortgage will only be foreclosed when he dies and only if no heir assumes the obligation to pay the debt and claim the property.
Reverse Mortgage Risks
In the reverse mortgage, rather than risks, we must talk about disadvantages. Like any financial instrument, you have to know its less favorable points before acquiring it. In the first place, we have that this type of loan is usually more expensive in administrative terms than a traditional mortgage. In addition, the interest, which is generally higher, cannot be tax-deductible during its term. Reverse mortgages come with many additional fees and costs, including mortgage insurance.
On the other hand, the amount of the credit that will be granted based on the guarantee of the real estate will depend both on the age of the requesting owner and on the guarantee or appraisal of the property. That is, the amount may be far from the real value of the guarantee. It also has the disadvantage that the debt increases by itself because the interest increases instead of decreasing. Another not so favorable point for this type of instrument is that it eliminates the possibility of leaving properties to heirs.
Is it worth taking out a Reverse Mortgage?
Hiring a reverse mortgage is worth it or not depending on who hires it. That is, each particular case has advantages and disadvantages. For example, for a single person who has a difficult economic situation, it may be a good idea. With the reverse mortgage, you can convert his real estate capital into a secondary income that guarantees a better standard of living until his death. In this case, he will be able to continue enjoying his property until that day without having to worry about paying the credit money.
On the other hand, if the economic situation of the owner of the home is not pressing, but on the contrary solvent, contracting a reverse mortgage to obtain an income is not worth it. Since, although the contract can be canceled at any time, the costs of recovery and interest plus capital can be very high, ending the possibilities of keeping the property in question in the hands of the family. Before making the decision to acquire it, it must be established in each case if the advantages outweigh the disadvantages.
