A reverse mortgage is a mortgage that homeowners over the age of 62 can get. A reverse mortgage is designed to aid seniors during times of need, or in other words, when they’re short on funds. In general, senior homeowners get a reverse mortgage if their retirement money is insufficient to satisfy their day-to-day needs.
It should be noted that there are no restrictions on how the amount can be used. With that said, senior homeowners can get a reverse mortgage in order to invest in real estate, as part of their retirement plan. It’s one way for senior homeowners to find financial security.
How Does a Reverse Mortgage Work?
When a senior homeowner gets a reverse mortgage, they convert part of their home’s value into cash. Basically, homeowners can borrow against their home’s equity (one of the requirements to get a reverse mortgage is that you have your own home). In short, instead of paying the lender, the lender pays the homeowner in small amounts. The interest is added to the loan balance, so the homeowner doesn’t have to pay a penny.
As long as the homeowner lives in the home, they don’t have to pay the loan balance. This is because the home acts as the collateral – when the homeowner moves, the money they make from the sale goes to the bank. If the home is worth more than what was borrowed, the money goes to the homeowner (as long as they’re still living). If not, it goes to the estate.
Alternatively, if the homeowner who got the reverse mortgage dies, and their children don’t want to give up the home, they have the option to pay the reverse mortgage.
Who Is a Reverse Mortage For?
If you’re struggling to make ends meet, you can get a reverse mortgage to make sure you can cover your day-to-day costs, such as transportation, utilities, and so on. A reverse mortgage also enables you to purchase that rental property you’ve been eyeing for a long time, or that you found through a reputable property management company.
Bear in mind, however, that it’s not for everybody. Let’s take a look at some of the requirements for borrowing against your home’s equity.
- You don’t intend to move. If you’re in your 60s, chances are you don’t intend to move. In general, you should only get a reverse mortgage if you don’t have plans to do a long-distance move – ever. Remember, if you get a reverse mortgage, you will have to pay the balance.
- You’re 62 or older. You have to be at least 62 years of age to get a reverse mortgage. It’s worth mentioning that your spouse should be at least 62 years old, as well, otherwise they risk losing the house in case you kick the bucket first.
- Your home has no sentimental value. If you’re living in a generation home, it’s not a good idea to get a reverse mortgage. This is because it will be used as collateral, and when you die, your children won’t be able to claim it. However, if it does not have sentimental value, you can leverage a reserve mortgage.
- You need the money. Don’t get a reverse mortgage if your money is sufficient for your day-to-day costs. However, if you’re in your retirement age, and you have health concerns that you need to raise cash for, it’s a good idea to get a reverse mortgage.
- You don’t need to relocate due to your health. You have to live in the home if you get a reverse mortgage. If you ever have to move, even if it’s for health-related problems, you will still have to pay off the balance.
Can You Rent Out Your Home If You Get a Reverse Mortage?
The short answer is no. If you get a reverse mortgage, you have to live in the home. Therefore, if you rent out your property to tenants, you’d no longer meet this rule. However, there is one way to rent it out without a violation.
You can rent it out if you continue to live in the residence. For instance, you could rent out certain rooms of your single-family home as a source of additional income, or put your property on Airbnb as a short-term rental. However, you still have to live in the home.
If you own a multi-family property, such as a townhouse, you can rent it out if you continue to live in one of the units. However, if you rent out your property while you move, you would be going against the rules of the reverse mortgage. You’d be in trouble with the law, so be sure to check with your property management agent to know what you can and can’t do when you have a reverse mortgage.
FAQs About Reverse Mortgage For Investment Properties
Can you rent out a room on a home that’s on a reverse mortgage?
Yes. You can rent out a room or rooms in a home that’s collateral to your loan. However, ensure that it’s allowed by your homeowner’s association (HOA).
Can you purchase a new property with the funds from a reverse mortgage?
Yes. There are no restrictions on how you can use the funds you got from your mortgage.
Do you have to live in the home forever if you rent it out?
The only requirement is that your home is your primary residence. A primary residence is one that you live in for at least six months in a year. Therefore, if you live in your property from January to June, but move to your second home from July to December, you would still be following the rules of the reverse mortgage.
If you plan to get a reverse mortgage in order to purchase an investment property to fund your retirement, consult the professionals first. At Luxury Property Care, our experts are committed to providing you with accurate and up-to-date information. Contact us today if you have concerns regarding reverse mortgages, or if you’ve already gotten one and you’re now “window-shopping” for a real estate investment.