What is a Reverse Mortgage?
A reverse mortgage is a federal loan available to seniors aged 62 or older and is used to release the home equity in the property as one lump sum or multiple payments. The homeowner’s obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves, they can be out of the home for up to 364 consecutive days. To qualify for a Reverse Mortgage the borrower must be at least 62 years of age. There are no minimum income, nor credit requirements, however there are other requirements. The application must qualify to “afford the home,” to cover taxes, insurance, utilities, water, gas, etc. For most reverse mortgages, the money can be used for any purpose, however, the borrower must pay off any existing mortgage(s) with the proceeds from the reverse mortgage.
- Increase monthly income
- Eliminate mortgage payment
- No monthly mortgage payments
- Fund home improvements
Fixed Rate Mortgages allow borrowers to access the most money from their reverse mortgage. This is typically the best option for those who may need to pay off large debts. All of the proceeds are required to be drawn.
The HECM Libor is an adjustable rate reverse mortgage. This option allows for the most flexibility with reverse mortgage proceeds. There is an option to keep all of the proceeds in a line of credit, or the borrower can take all of the money like the HECM Fixed Rate reverse mortgage.
These loans are non proprietary products and is not backed by the FHA. The proceeds are often quite lower than a traditional HECM reverse mortgage and the rate is often much higher. This product works effectively for homes valued over two million dollars.
Many people are are not properly informed on how a reverse mortgage can benefit their lives. The Pros and Cons of a reverse mortgage are itemized below. The lists clarify several myths as well.
- Stay in your home. You do not have to move out of your home or relinquish your title once you have finalized on your reverse mortgage. You keep your home.
- The money is yours to do with as you please.
- Your credit score and current income are not considered when applying for a reverse mortgage. The amount of your reverse mortgage loan is determined by the current interest rate, value of your home and your age, which you must be at least 62 years of age or older.
- You will have no payments while you are in your home. The principle guideline for the reverse mortgage program is that you remain in your current home. As long as you stay in your current home, you do not have to make any payments.
- Your reverse mortgage is not taxable. You do not have to file any tax forms at the end of the year with a reverse mortgage.
- The fees of a reverse mortgage may be higher than a conventional mortgage. The cost of the FHA mortgage insurance and origination fees generate the higher costs for reverse mortgages.
- There is a cap on the amount of loan proceeds you can receive.
- The loan balance gets larger over time and the value of the estate/inheritance may decrease over time.
- Reverse Mortgages are a scam
A reverse mortgage is a well thought out, very creative and highly effective solution to a societal problem—the inability of some seniors to have enough money to get through their retirement years. With people living longer than they might have anticipated and with many people’s savings diminished by the economic downturn, being able to use your home equity is one of the sources of support and comfort available.Reverse mortgages are too good to be true
Reverse mortgages are not a fantasy. They are by no means a trick. You worked hard to earn the equity in your home and you deserve the chance to use that money if and when you need it. There is a cost attached to a reverse mortgage, as with every loan. And there are responsibilities that come with it.Reverse mortgages are a last resort loan
In some people’s cases they may be. For others they may not be. You may choose to use a reverse mortgage to help you cover your expenses while you wait for your retirement savings account to go back to their pre-recession levels. You may use it to help you through until home values recover and you can sell your home for a higher price. A reverse mortgage, like social security, medicare/Medicaid, IRs and 401-Ks, is an option in a retirement toolbox—and different situations require different tools.Reverse Mortgage Fees are too high
Reverse mortgage fees are similar to those for any other mortgage product. The one additional fee is the Mortgage Insurance Premium, which is paid to the government mortgage insurance fund to protect you in the event the loan balance grows larger than the value of your home. The HECM Saver has practically eliminated the upfront MIP. Other traditional fees are also sometimes waived by the lender.The bank owns your home
No, you continue to own your home. And when you pass on, your heirs own your home, though they must then pay back the reverse mortgage or sell the property and keep the remaining balance. If you are in arrears on taxes and insurance, you are in default and, to keep your home, you must work with the lender to catch up on your obligations.
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