Reverse annuity mortgage is referred to as a loan against the value of your home. It provides equity against your home without selling or moving out from your home. Plus, it provides more flexibility than other reverse mortgages. It proves to be beneficial for retired people to live their retirement as they dreamed of. And for generating quick loans. Due to this, the reverse annuity mortgage has different types, which will be defined later in the blog.
What Is Reverse Annuity Mortgage?
A reverse annuity mortgage is a loan that is secured against the value of your home. It allows you to cash in some of your home’s equity, without having to sell or move out.
Home Equity Bank’s reverse annuity mortgage is called Income Advantage. It provides borrowers with regularly scheduled payments that can be paid on a monthly, quarterly or semi-annual basis.
Reverse annuity mortgage is opposite to forwarding mortgage, which is used to buy homes and homeowners have to make the loan payment.
Federal regulations require lenders to structure the transaction so that the loan amount doesn’t exceed the home’s value and that the borrower or borrower’s estate won’t be held responsible for paying the difference if the loan balance does become larger than the home’s value.
How does a reverse annuity mortgage work?
The advantage of income is only available to the homeowners aged 55 or above. And, the total amount which they will receive will depend upon the value of a home, its location, age and any mortgages or loans already secured on the home.
It effectively turns the equity in your home into a regular and dependable source of income.
The homeowner gets to choose how to receive these payments (we’ll explain the choices in the next section) and only pays interest on the proceeds received.
The Income Advantage loan is split into two parts. There is a required minimum lump sum of $20,000, which is forwarded to you when your loan is approved. There is also a secondary sum, from which regular amounts are drawn. Plus homeowners have the title to the home as well. As the duration goes on the homeowner’s debt increases and home equity decreases.
In the case of a reverse annuity mortgage, when the homeowner moves or dies, the proceeds from the home’s sale go to the lender to repay the reverse mortgage’s principal, interest, mortgage insurance, and fees. Any sale proceeds beyond what was borrowed go to the homeowner (if still living) or the homeowner’s estate (if the homeowner has died). In some cases, the heirs may choose to pay off the mortgage so that they can keep the home.
You can also read about the present value of the annuity due table on one of our blogs.
Flexibility of a reverse annuity mortgage
The Income Advantage reverse annuity is considerably more flexible than other reverse mortgages. It is similar to a line of credit. The minimum monthly amount you receive is $1,000, but this can be more if you need it.
You can stop or start receiving payments at any time and you have privileges that allow you to pay a lump sum every year (up to 10% of the outstanding principal). You can increase or decrease the monthly sum you receive and you only pay interest on what you’ve actually borrowed, not the entire amount that we have agreed to lend you.
Who would need a reverse annuity mortgage?
People who are closed to retirement or are in their retirement phase and wants to increase their income. Usually, people realise that they have not saved enough and their pension income is not enough for their retirement life.
Also, the pension income has not kept up with the inflation, so it gets very difficult for people to be completely dependable only upon the pension income.
Reverse annuity mortgage provides an income advantage to a variety of people and relieves them of financial worries.
Mostly, this extra income is used to:
- Increase their monthly cash flow
- Help pay their regular monthly bills and loans
- Pay for general home maintenance
- Improve or maintain their lifestyle
- Take a bucket list trip or regular vacations
- Pay for home health care
- Enjoy the kind of retirement they’ve always dreamed of
Types of Reverse Mortgages
The reverse annuity mortgage is divided into three different types. Out of which home equity conversion mortgage (HECM) is the most common. If your home is worth more, however, you can look into a jumbo reverse mortgage, also called a proprietary reverse mortgage. When a person chooses to take reverse annuity mortgages they can receive the payments in one of the six ways:
Get all the proceeds at once when your loan closes. This is the only option that comes with a fixed interest rate. The other five have adjustable interest rates.
Equal monthly payments (annuity)
For as long as at least one borrower lives in the home as a principal residence, the lender will make steady payments to the borrower. This is also known as a tenure plan.
The lender gives the borrower equal monthly payments for a set period of the borrower’s choosing, such as 10 years.
Line of credit
Money is available for the homeowner to borrow as needed. The homeowner only pays interest on the amounts actually borrowed from the credit line.
Equal monthly payments plus a line of credit
The lender provides steady monthly payments for as long as at least one borrower occupies the home as a principal residence. If the borrower needs more money at any point, they can access the line of credit.
Term payments plus a line of credit
The lender gives the borrower equal monthly payments for a set period of the borrower’s choosing, such as 10 years. If the borrower needs more money during or after that term, they can access the line of credit
It’s also possible to use a reverse mortgage called a “HECM for purchase” to buy a different home than the one in which you currently live. Also called a Federal Housing Administration (FHA) reverse mortgage, this type of mortgage is only available through an FHA-approved lender
In any case, you will typically need at least 50% equity—based on your home’s current value, not what you paid for it—to qualify for a reverse mortgage. Standards vary by lender.
Advantages of a reverse annuity mortgage
There are several advantages of the Income Advantage reverse annuity mortgage. Many of our customers have been living in a property whose value has been constantly appreciating, but with an income that has stayed the same or decreased. Income Advantage allows them to cash in on that growing equity and turn some of it into regular, tax-free income.
One of the most appealing aspects of Income Advantage (and the reverse mortgage in general) is that this is a loan that doesn’t require any regular repayments. Our customers do not have to pay anything against the loan until they choose to sell their home or move out.
This is a key advantage in that it provides regular income with no negative impact on our customers’ cash flow.