What is a Reverse Mortgage?
Are you wondering if a reverse mortgage might be right for your present circumstances? If you own a lot of equity in your home, and if you are aged 62 or above, you could benefit from a reverse mortgage. This will give you access to a new income source that could help you enjoy your retirement or cover unexpected expenses.
But what are reverse mortgages, and how does it work?
Reverse mortgages give homeowners aged 62 or older, who have paid all or most of their mortgage off, the opportunity to release that equity. It is known as reverse mortgages because instead of the homeowner making payments to the lender, the lender makes payments to the homeowner.
The homeowner in this arrangement doesn’t have to sell their home or move out. The lender will be repaid when the borrower moves out for whatever reason. This could be because of death or selling the home.
In a nutshell, a reverse mortgage is an excellent loan product for seniors.
How The Reverse Mortgage Works
The federal government backs the most popular reverse mortgage option. The Home Equity Conversion Mortgage, or HECM, currently allows borrowing of up to $765,600, though this limit depends on several factors.
The borrower’s age and current interest rates are two factors that affect the principal limit that can be borrowed. The amount that can be borrowed will increase if the homeowner is older, the home is worth more, and interest rates are lower.
A variable-rate HECM could also increase the amount of money released from the home. You can choose to have this money paid to you in a few ways; equal monthly payments while a borrower lives in the home, monthly payments for a certain fixed period, or a line of credit. You can also have a combination of a line of credit with fixed monthly payments if you wish.
These options are only offered with variable rates, and if your HECM has fixed has interest rates, you will receive a lump sum.
Though whichever option you choose, you will have to pay interest every month. Also, don’t forget about property taxes, homeowners insurance, and the other expenses of living in a property that you will still need to pay.
Who Are Eligible For Reverse Mortgages?
Along with being at least 62, there are some other requirements necessary to qualify for reverse mortgages.
The home should be your main residence, and if you have a mortgage on the property, it has to be paid off from the proceeds of the reverse loan. You can have a single primary lien against the property, and you need to have paid your taxes as well as other legal obligations.
The home should have been built since 1976 if it is a manufactured home; otherwise, other types of homes will be accepted as long as they have been kept in a good state of repair.
Anyone applying for this type of loan will need to attend an information session from a counselor approved by the HUD. This should ensure that you understand the potential problems so that you don’t run out of funds earlier than you expect.
When seeking mortgage approval, it goes without saying that you can’t have bad credit that would prevent you from getting a loan.
What Are The Costs Involved When Taking Out a Reverse Mortgage?
You will have to pay costs when closing on your mortgage, which could be a substantial expense. However, for most of the other costs, you can choose to pay them from the funds you receive. While this will reduce the amount of money you have each month, it will mean that you have less to pay upfront.
You will need to pay mortgage insurance premiums, which can amount to half a percent of the loan each year, with 2% upfront. There will also be an origination fee, which could be a maximum of $6,000 for your loan processing.
There could also be service fees to maintain the loan. Also, be sure to factor in the cost of a house appraisal and any home inspection fees. You may have to pay for a credit check, a recording fee, as well as title searches, and insurance as well.
Should You Get a Reverse Mortgage?
If you need a source of extra money in your retirement, this type of financial product can give you the funds you need. There are disadvantages as well as advantages, however.
If your home decreases in value, your heirs could end up foreclosing on the property or handing the home over to the lender. If you have other family members living in the home, they can find themselves in a difficult position if they still want to live in the property.
You should carefully consider if this option is right for you before signing on the dotted line. A counselor can help you understand the full implications of the decision before you make your choice.
Final Thoughts on Loans For Seniors
Over the years, there have been quite a few negative things written about reverse mortgages. Much of this negative press was due to the fact there used to be many scams surrounding reverse mortgages. Awful companies used reverse mortgages as a front to bilk seniors out of thousands of dollars.
There are no longer the same concerns now as there used to be. If you work with an established reverse mortgage lender, you should have no issues. Reverse mortgages serve a great purpose for those who need to tap the equity in their home. Like any other financial product, there are pros and cons.
There are many reasons why you might want to refinance a mortgage but if you’re a senior, rather than increasing your debt through a traditional mortgage, this might be the more prudent route to take.
Just make sure you do your due diligence for any company you’re considering using. In the end, you are likely to be happy with your decision as reverse mortgages can be an outstanding financial tool.