A reverse mortgage is a type of mortgage that allows homeowners 62 and older to relinquish equity in their homes in return for good spending money. While a traditional mortgage typically counts as debt, a reverse mortgage could go a long way to getting a person out of debt.
What this means is that, once a person gets to 62, they can decide to stop making mortgage payments and start receiving cash payments instead for their home. They’ll only be required to pay upkeep expenses, insurance and taxes until whenever they kick the bucket or decide to leave the home. A person who takes out a reverse mortgage would have a lot of money coming into their bank accounts. This money can take care of several major expenses, one of which is tuition for college kids.
Educationdata.org reports that amongst adults who have student loan debts, 93% had borrowed money to pay for their education while 81% borrowed to pay for their children’s or grandchildren’s education. If more people knew about how a reverse mortgage could help pay for tuition, these numbers might be a lot lower. Here are a couple of things you need to know about how to tap into your home’s equity to pay for tuition.
How Does a Reverse Mortgage Work?
When a reverse mortgage borrower requests funds in return for the equity in a property, these funds could be given in the form of a regular stream of income, a lump sum, or a line of credit for the period you live in the house. It could also come as a combination of all three. After the property used to take out a reverse mortgage is sold, the lender gets his money back including interests and fees.
The interest is always charged after the borrower receives the money. This is unlike a traditional mortgage where the borrower is expected to make regular payments.
This type of mortgage is very similar to a home equity line of credit or a home equity loan. The only difference is that with reverse mortgages, the lender pays you instead of the other way around. A Home Equity Conversion Mortgage (HECM) represents over ninety percent of all reverse mortgages and is the most popular type of reverse mortgage.
What Are Your Financial Obligations as a Reverse Mortgage Borrower?
One of the most frequently asked questions about reverse mortgages is whether the borrower is expected to pay interest. The interest in this kind of loan comes from the home’s equity, which means the borrower is not expected to make any out-of-pocket payments.
The borrower is however expected to still pay such reoccurring fees as regular home maintenance, Home Owner Association dues, property taxes, utility bills, and relevant insurance payments.
Not Everyone is Eligible for a Reverse Mortgage
A person must be 62 years or older to be considered eligible for a reverse mortgage. A reverse mortgage borrower must also be the outright owner of their home. If you haven’t paid off your mortgage before applying, the leftover balance on your mortgage must be small enough that it can be paid off with the money gotten from the reverse mortgage. A borrower must also not owe any federal debt, which means that your income taxes and student loan payments must be up to date. Finally, a borrower is required to live in the property on which they’re taking out a reverse mortgage.
A Reverse Mortgage is not Taxable
A reverse mortgage is just an advance on one’s home equity and as such, the money gotten from a reverse mortgage cannot be taxed. Additionally, the interest paid on it, will not be considered tax-deductible until you pay off the loan. However, if you decide to save up the money gotten from a reverse mortgage, it may affect your eligibility for some public benefits.
When will You Repay a Reverse Mortgage?A reverse mortgage must be repaid when the borrower and their spouse die. Or if the borrower and their spouse do not live in the house for a year or more. You’ll also be expected to pay off this mortgage as soon as you sell the house; if you decide to sell the house. Or if you stop paying for the maintenance of the home and other dues. This means that any parent who qualifies for a reverse mortgage could easily take out one to help take care of their children’s tuition and other fees without being overwhelmed by repayment obligations.