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What is a reverse mortgage loan? Understanding more about this loan type

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What is a reverse mortgage loan? Understanding more about this loan type

A reverse mortgage loan is a unique type of financial product. These products are designed to cater to senior citizens who usually have limited options at hand for generating income. Senior citizens who already own their homes but do not wish to sell the same while adding to monthly cash flows can consider the Reverse Mortgage Loan schemes available. These schemes help senior citizens cash in on the latent values of their homes while living in them throughout their entire lifetime. Reverse mortgage loans are very different from regular home loans. Under this framework, borrowers get instalments and these are paid out in full in the future. With reverse mortgage loans, borrowers can get payments in a mixture of lump sum amounts, periodic clearances or a credit line, depending on their needs.

The loan amount usually depends on the home value and the age of the borrower and also the rate of interest that has been agreed upon. The monthly payments that are permitted at a maximum under this reverse mortgage loan scheme have been limited to Rs. 50,000 while the lump sum payments are at 50% of the overall eligibility amount or a maximum of Rs. 15 lakhs for purposes like medical treatments of the customer, his/her spouse and also dependents. The money that is taken under reverse mortgage loans may be deployed for particular reasons including medical emergencies as stated earlier along with regular expenditure, renovation/repair of a home and loan repayment for the same home in question.

However, the amount that has been borrowed cannot be deployed for any trading or business purposes or any such speculative reasons. Along with getting periodic or lump sum payments, the reverse mortgage facility can also be tapped for purchasing annuities from life insurance companies. Under this system, the lender will be providing a lump sum amount to a life insurance company to enable the borrower to buy an annuity. Senior citizens aged above 60 years owning residential homes can take recourse to reverse mortgage loans either by themselves or in partnership with their spouses. The spouse should be more than 55 years in case of a joint application by a couple. The residential home should be owned individually by the senior citizen or even jointly with his/her spouse.

Reverse mortgage loans can be taken on any property which is used as a primary residence. Any leased out commercial/residential property cannot be provided as collateral in this case. A property which already has an outstanding loan cannot be perceived as eligible for a reverse mortgage loan until the outstanding loan amount has been cleared. Yet, a portion of the lump sum amount garnered under the reverse mortgage scheme can be deployed for repaying the outstanding home loan amount. Borrowers have to provide PAN card copies, a list of legal heirs to the property and also the registered will copy along with other information about the property that has been mortgaged and the application form as well. The lender has to be informed as well about any further changes to the will.

The maximum loan tenor is usually 20 years and a periodic payment stream can be received while one continues staying in the property in question. Even after the borrower’s death, his/her spouse can continue staying in this property for his/her lifetime. The interest rate varies from one financial institution to another. In case the loan has to be stopped, the outstanding amount can be prepaid without any charges or fees whatsoever. The reverse mortgage loan may not be repaid throughout the lifetime of the customer and his/her spouse since they will otherwise have limited streams of income post retirement. After the demise of the borrower, the legal heirs can redeem their property by paying off the outstanding dues. The house will be sold by the bank in case the legal heirs do not claim/redeem the property in question and the surplus amount will be passed onto them thereafter.

Yet, the legal heirs will not have to pay any shortfall in any scenario. The reverse mortgage loan product may be a vital one for senior citizens who desire to be financially independent in the later stages of their lives. However, they must be aware of all the key aspects of the product. You should always make sure that you go through the terms and conditions of the loan agreement carefully before finalizing the deal. Additionally, along with doing comprehensive research well beforehand, you should also consult a financial advisor/expert. There are regular reverse mortgage loans available along with reverse mortgage loan enabled annuities. These are different kinds of products and should be compared in order to ascertain the one which fits your needs in the best possible manner.

In most cases, 40-50% of a residential property’s market value is offered by a financial institution. In case you get an offer exceeding this, consult your trusted financial advisor to learn more about the reasons behind the same. There may be processing fees (one-time) charged by lenders which is 0.5% of the amount of the loan but you should check carefully for any hidden costs beforehand. There are no repayment based compulsions. You can easily redeem the home prior to the conclusion of the time period that has been agreed upon. You need not repay your mortgage as long as you are residing in the property. Payment will be due only upon the borrower’s demise or when the borrower sells the property or shifts out from the same. There is zero prepayment and penalties available which makes things more convenient for borrowers. There are no taxes imposed in case the borrowers pay back the outstanding amount from other income streams without selling off the property in question. In case the property is sold by the financial institution, then capital gains of the borrower are taxable. The annuity received by the borrowers will also be taxed accordingly.

The applicant has to prove that he/she can easily pay for insurance of the home, taxes and maintenance costs. The home will be lost in case the taxes are not cleared on time and the insurance premium is not updated. These deals may be cancelled within 3 days of finalization as well. As a result, borrowers should think carefully before entering into the loan itself. You cannot, however, invest your money in other real estate acquisitions or even in shares. Reverse mortgages are great options for senior citizens who wish to upgrade to improved lifestyles but cannot do so due to lower income from various sources. However, all intrinsic aspects of this financial product should be taken into consideration before proceeding with the deal.

 

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