No one can predict the future, but there are ways to prepare for it to look like what we have in mind. For example, by having an extra income for our retirement pension. One way to achieve this is with a mortgage, but in reverse. These are what are known as reverse mortgages. Don't you know them? Let's fix it!
What is a reverse mortgage and how does it work?
Unlike a traditional mortgage , with a reverse mortgage you are the one who receives money from the financial institution for your house. So are you selling your home? No. Is it like a second mortgage? Sort of.
According to the Bank of Spain (BdE) Guide on reverse mortgages, this is a “credit or loan secured by a mortgage” in which “unlike a normal mortgage, the debt does not decrease over time, but increases” until someone, who may be the owner or the heirs, pays it off. In addition, unlike a conventional mortgage, with this tool there are no monthly payments. The entire debt will normally be paid off upon the death of the owner.
To make it easier to understand, a reverse mortgage allows you to turn the value of your home into cash without having to sell it. In fact, you will keep ownership and life usufruct . This way you can live in it, rent it out, and even sell it.
What the bank does is value the property and grant you a loan, usually between 25% and 50% of that value, with the house acting as collateral. This way, you can have liquidity for your retirement and keep the property. A series of interests will be applied to that capital until the time comes to pay.
How to repay reverse mortgage money
This product does not require you to pay a fee, as is the case with a traditional mortgage.
Repayment of the reverse mortgage and the debt generated usually occurs upon death. At that time, the heirs can choose between paying off the debt and getting the house back or collecting the remainder of the loan, although this depends on the type of reverse mortgage. It is also possible to sell the house during your lifetime to pay off the debt or pay it off with other money.
What types of reverse mortgages exist?
There is more than one way to approach a reverse mortgage depending on how you want to collect and repay the money.
• Temporary reverse mortgage. With this, you receive the agreed amount of money over a negotiated period of time. When this date is reached, you will no longer receive the money, but you will be able to continue using the house. Some mortgages include a clause according to which you must start repaying the loan after this time.
• Reverse mortgage for life. This is the most common type of mortgage, and involves transforming the money from the reverse mortgage into a life annuity insurance policy, which ensures that you will receive an income for your entire life, whether or not the value of the loan is exceeded.
• Single-draw reverse mortgage. With this option, you will receive all the money at once and you can do with it whatever you want.
Who can take out a reverse mortgage?
The reverse mortgage is intended as a tool to provide income until the death of the holder, upon retirement or in the event of disability or severe dependency. This is reflected in the requirements for accessing it.
Thus, they can request a reverse mortgage:
• People over 65 years of age.
• People who have a disability equal to or greater than 33% or a situation of severe or great dependency.
In addition, there are financial institutions that reserve this product for people over 70 years of age.
In addition to age, the second condition is to own a house, preferably free of encumbrances. That is, you must not have another outstanding mortgage, for example. From there, it does not matter whether or not it is your habitual residence, although you will have better conditions if it is your habitual residence.
Reverse mortgages are a tool that parents or retirees often use to supplement their pension by taking advantage of the value of their home and without having to resort to the help of their children.
What can you do with your house if you have a reverse mortgage?
The advantage of a reverse mortgage is precisely that, the house remains yours for all purposes, it just acts as collateral for a mortgage loan.
This way, you can continue living in the property, you can rent it out (if you want), make any renovations you want and, of course, sell it. However, if you do so, you must make sure that you have enough money to repay the reverse mortgage plus interest.
What happens to reverse mortgage debt?
Reverse mortgage debt does not disappear, but rather is carried forward in time, usually to the next generation.
Normally, when the owner of the house dies, the heirs receive the house and the mortgage debt as part of the inheritance. This is where they must decide what to do with it: pay off the debt and keep the house or give it up.
In the end, a reverse mortgage is just another option to supplement your income thanks to your home. There are other alternatives such as renting out your house and moving to another more affordable one that meets your real needs. Many people keep the family home with three or more bedrooms when in the end only the couple remains.
Another option is to sell the bare ownership of the house and keep the usufruct, so that you can use the house until your death.