Is a Reverse Mortgage the Right Mortgage for You?
A reverse mortgage sounds nice, but what is it? For people who are aged at least 62 and who could do with some cash, then a reverse mortgage may seem like an appealing opportunity. Basically, a reverse mortgage lets you take some of the equity out of your home, by which I mean a bank will give you some cash in exchange for a part of your house. Not only will they give you cash, but they also let you stay in your house. There are no monthly payments to be made and you don't pay the mortgage back until you leave your home (i.e. when you die if necessary).
The bank gets its money back when you die, when you sell your home, or if your home is no longer your "primary residence". This type of mortgage is usually tax-free, and will probably have no restrictions in respect of income.
The three types of reverse mortgage
1 Single-purpose reverse mortgages - these are made available by state and local government agencies and also non-profit organizations
2 Federally-insured reverse mortgages, also called Home Equity Conversion Mortgages (aka HECM). These are backed by the US Department of Housing and Urban Development
3 Proprietary reverse mortgages, these are private loans backed by the private companies providing the loan.
Single-purpose reverse mortgages are the cheapest, but they are not available everywhere and are limited to a single purpose. This "purpose" is defined by the lender. For example the loan may be restricted to financing home repairs or taxes on property. Most homeowners on moderate incomes qualify for these mortgages.
Proprietary reverse mortgages and HECMs are more expensive than traditional home loans, and may require significant upfront costs. This is an important consideration, particularly if you think you might move out quite soon or if you only want to borrow small amounts of money. HECM mortgages are not difficult to find, and have no requirements with regard to purpose, income or health.
For a HECM, you first have to meet with a government-approved counsellor. The counsellor must tell you what costs are involved and any financial implications. He/she must also inform you of any alternatives, such as non-profit programs, single-purpose reverse mortgages etc.... Counsellors must also advise on the costs involved in the different types of reverse mortgages and explain the overall cost of the loan.
Counselling agencies charge around $120 but you can opt to add the fees to the loan. You also cannot be refused simply because you do not have the money to pay the fees.
There are a number of factors governing the amount you can borrow with a proprietary reverse mortgage or HECM - your age, the appraised value of the property, the type of reverse mortgage, and interest rates. As a general rule, older people who have more equity in their home, and less of their mortgage still owing can borrow more.
For an HECM there are a number of payment options (they pay you, you don't pay them).
1 A "term" option - you are paid a fixed monthly payment over a specific period of time.
2 A "tenure" option - you are paid a fixed monthly payment for however long you continue to live in your home.
3 A line of credit - you can withdraw money from the loan whenever you like and whatever amount you like, until the credit is used up.
4 A combination of monthly payments and a line of credit.
You can change your payment option at any time for a fee of around $20.
HECMs are normally larger loans at a lower cost, than proprietary loans. If your home is a high-value home, you may be able to obtain a large loan advance from a proprietary reverse mortgage.
Reverse Mortgage Features
They are not taxed, and generally do not affect any Social Security or Medicare benefits.
You retain the title to the home.
There are no monthly repayments for you to make.
The loan is paid back when the last borrower still alive either sells the home or dies or the home is no longer their principal residence.
A HECM loan allows you to live in a medical facility or nursing home for a maximum of 12 consecutive months before you are obliged to repay the mortgage.
However, there are disadvantages to reverse mortgages :-
* You may end up with the mortgage provider owning your home. Some people actually call reverse mortgages "Generational Theft". It is fair to say that banks are not in existence to make friends, their sole purpose is to make money, if they can make that money from you then so be it. Because of this many people advise you to avoid reverse mortgages whenever possible.
* There is usually an origination fee, mortgage insurance premium (for federally-insured HECMs), plus additional closing costs. Lenders can also apply servicing fees over the lifetime of the mortgage.
* The amount you owe on a reverse mortgage increases with time. Each month, interest is added to the balance you owe. This means that the amount you owe increases over time.
* The rates for some reverse mortgages are fixed, but most have variable rates linked to a financial index: these interest rates will probably change in line with market conditions.
* Reverse mortgages can destroy the equity in your home, thus you and your heirs may be left with very little. Reverse mortgages usually contain a "non-recourse" clause. This means that you cannot owe more than the value of your home when the loan is repaid.
* You retain the title to your home. You are therefore liable for property taxes, insurance, utilities, maintenance, fuel and other expenses. If you fail to keep up with the payments of your property taxes, if you fail to take out home insurance, or fail to maintain your home, you may be required to repay the mortgage.
* Interest is not deducted from income tax returns until you pay the loan off in full or in part.
A final piece of advice - make sure you shop around and that you understand what you are signing. With reverse mortgages you usually have at least 3 business days from the day you agree the mortgage to cancel it, without penalty. If you want to cancel the mortgage, you must inform the lender by certified mail with a return receipt.
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