The Basics of Reverse Mortgages (What Is A Reverse Mortgage)
With the increase of average life-expectancy, ever rising costs of living, and retirement accounts being decimated by the recent recession, reverse mortgages are becoming more popular than ever. For some people, they are the ticket to living retirement out in their own home.
-How it works
A reverse mortgage is a loan based on the equity in your home. After filling out your application, a review of your eligibility, and loan approval, a bank will give you payments based on that equity. However, unlike other loan programs, you don’t make any payments until the home is no longer used as your primary residence. In other words, you don’t pay the loan back until you move out of the home or pass away. In the mean time, the money can be used for medical expenses, a more comfortable retirement, or even home improvements. Find Out How You Get Paid With Reverse Mortgages.
-Who may benefit from a reverse mortgage
Reverse mortgages are a good option for the elderly who want to stay in their home, but need supplemental income to do so. As long as your home remains your primary residence, no payments are required. When repayment becomes necessary, there are a few options, including the sale of your home.
-Important things to keep in mind
A reverse mortgage doesn’t free up homeowners from other responsibilities. While you still own the home, you will need to keep up with maintenance, taxes, insurance, HOA fees, etc. After all, the bank is giving you a loan on the assumption that your property is going to at least hold, if not increase, in value.
Additionally, each program has eligibility requirements like age and that your home doesn’t currently have a loan on it.
How You Get Paid:
What Is The Criteria To Qualify For A Reverse Mortgage
Not everyone can get approval for a reverse mortgage because there are several requirements that must be met. If you do qualify, this option is an option to get some money back from your home investment.
The first requirement is in regards to age, and you must be 62 years old. This is the first criteria for qualification through the Federal Housing Administration or FHA, who is the main provider of reverse mortgages.
Next, the home that you are applying for a reverse mortgage on must be your main residence. This means that you are unable to apply for a reverse mortgage on a rental home that you own or a vacation home. It must be a home in which you spend most of your time residing.
The last major qualification for a reverse mortgage is that you must own the home and have paid off most or all of it off. If you recently bought your home, or have not been paying it off for long, you will probably not meet this qualification. Sometimes you can still get approval. If you do, a legal requirement is that you to use some of the funds that you receive to continue paying on your original mortgage. You will be unable to get the total value of the home back through this process due to the limitations on amounts borrowed.
The reverse mortgage is not the right option for every home owner so weigh your options before pursuing it. Other factors may hinder your application such as other individuals living in the home. You will be required to meet with a reverse mortgage counselor before you receive an approval. This is to ensure that you qualify and that it is an option for you to take.
The Advantages Of A Reverse Mortgage
You may have heard of the disadvantages of a reverse mortgage and how some older individuals have gotten taken advantage of and lost their homes as a result of undergoing an reverse mortgage. While horror stories are certainly out there, this is only part of the story. There are many positives of reverse mortgages mortgages as well and this article will highlight some of these considerations.
The major advantage of an reverse mortgage is that it provides you with immediate cash that you need to finance your lifestyle. For many people who are older they don’t have any assets for retirement other than a home and they need to borrow against their home in order to meet their expenses. By doing so they can live in their home when they are older and have a place to stay yet be able to capitalize and finance their lifestyle with the money generated from their home.
With a reverse mortgage the major advantage is the cash it generates to meet your expenses without requiring a sale of your home, thus not creating a lack of living quarters as an elderly person would face if they chose to sell their home.
The Disadvantages of a Reverse Mortgage
With a reverse mortgage you are still responsible for property taxes, the cost of homeowner’s insurance, and the repair and upkeep of your home during the term of the loan. If you do not meet these obligations the loan may become immediately due.
If for some reason you have to move, the loan comes due. It’s important to understand the reverse mortgage is nothing but a loan extended to you based on a portion of the equity in your home. Considering that you must be a minimum of 62 to get a reverse mortgage loan, moving may well not be a choice but an age and infirmity related necessity. Dealing with the sale of your home at such a time can place great stress on you and your family.
If you take the proceeds from a reverse mortgage loan as a lump sum it will likely have an effect on your Social Security and Medicare benefits (this is not usually true for monthly payments).
Compound interest accrues on a reverse mortgage loan and must be repaid, along with principal and most other loan costs at the time of your death or when the home ceases to be your primary residence. It’s worth noting that interest rates and loan initiation costs for reverse mortgages are usually higher than they are for traditional mortgages.
The interest on the principal is typically paid at end of the loan so you’ll likely lose your annual interest write-offs.
You may outlive the equity available and run out of money.
Reverse mortgages are complex financial products and many who think they understand them don’t. This point of view is shared by the Consumer Financial Protection Bureau.
How To Qualify For A Reverse Mortgage – Eligibility
To qualify for a reverse mortgage, it is important to first understand what it is. A reverse mortgage is a loan for homeowners who have lived in their home for a number of years, where a portion of the home’s equity is used as collateral. To get a reverse mortgage, you must be eligible and be able to answer “yes” to the following questions:
1. Do you own your home?
2. Are all of the homeowners at least 62 years old?
3. Do you live in your home at least half the year?
4. Is your home debt free or almost debt free?
In most cases it is alright if you have some debt against the house. If you find that you qualify for a reverse mortgage, you can use a cash advance from the reverse mortgage to pay off debt against your home. It is important to note, reverse mortgages cannot be used for cooperative apartments or for mobile homes. – LEARN ABOUT HECM LENDERS.
If you answered “no” to any of the questions, you still have options to consider such as a home equity line of credit or a second mortgage.
Some of the benefits of a reverse mortgage are you don’t have to pay the loan back immediately. Terms and conditions of the loan are discussed and agreed on only if you are satisfied with the reverse mortgage terms.
DON’T FORGET : Reverse mortgages are also tax free and have no income restrictions on the borrower. However, there are some disadvantages with a reverse mortgage such as affecting the inheritance of the borrower’s heirs. Some financial experts agree that it is best to do some research before signing up for a reverse mortgage.
Typical Reverse Mortgage Costs
It is important to understand the costs associated with a reverse mortgage before you enter it. To start with. There are closing costs or loan origination costs when you first enter into a new loan. These costs are typically calculated as a percentage of the amount borrower in addition to some set fees such as title checks on the property as well as credit checks on the borrower.
With these costs a reverse mortgage lender is making sure that there are no tax liens or other liens on the property that may make the reverse mortgage loan riskier and to insure that the person that is borrowing under a reverse mortgage is the actual home owner. Typically another initial cost of a reverse mortgage is title insurance that a borrower will have to pay to insure that the home is properly titled and in the name of the borrower.
Another cost of a reverse mortgage is the interest that will be paid as long as the loan is outstanding. Check the terms of the reverse mortgage agreement to see both the nominal and actual rate of interest and to truly understand how much interest will be owed in the case of a term loan repayment ask to see an amortization table on the reverse mortgage loan.
If you repay a reverse mortgage loan early there may be some early repayment fees on the loan. Be sure to check the agreement to be aware of any of these fees. Some locations have outlawed prepayment fees on mortgages but not on reverse mortgages so be aware of the terms of the agreement as well as your local state laws when entering into a reverse mortgage loan.