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Reverse Mortgage

Reverse mortgage

REVERSE MORTGAGE: HOW DOES IT WORK

A reverse mortgage is a loan utilized by homeowners 62 years of age and above, having considerable equity on their homes. This loan amount is often received either in a lump sum, line credit, or fixed monthly payment and is payable should the borrower permanently move away, die, or sell the home.

If you are 62 years and above, facing unexpected huge expenses, and have run out of savings or any other source of income, you could resort to a reverse mortgage. In this type of mortgage, the lender gives you money in exchange for your cumulated equity, and you are not required to make loan payments. 

The government has set rules that govern lenders so that they do not give out loans that exceed the home value. The borrower or their estate can not pay the difference should the lender give out loans that exceed the home value. Therefore, if there is a drop in home market value or the borrower lives longer than expected, the lender may have to carter for the resulting loss.

A reverse mortgage can also allow senior homeowners to convert only part of the home equity into cash to defray their pending bills. A reverse mortgage process is complicated and requires thorough research to determine if they are right for you. You should take care with a reverse mortgage since it can use up your home equity, leaving you and your heirs little of nothing in the end.  

How Reverse Mortgage Work?

Regular mortgages require that the borrower pay the lender every month, which will eventually lead to homeownership. The reverse mortgage acts reverse, in which you receive payments from the lender. The lender utilizes the equity in your realestate, converting it into payments advanced to you.

The payment is often tax-free and does not require you to pay back, provided you live in that home. If the borrower dies, moves out, or sells the home, they, their spouse, or their estate would repay the loan. 

As a homeowner, you dictate how you will receive the payments, but you will pay the interest on the money awarded to you. Often this interest amount is added to your loan balance, meaning you are not required to pay any upfront fees or deposits. Throughout the life of your reverse mortgage, your debt will increase, and your home equity declines, though you will keep the home title. 

Your house is the guarantee for the reverse mortgage; meaning should the house be sold upon the borrower’s death, the proceeds will go to the lender. The profit originating from the house sale will go to the borrower or the estate if the homeowner dies. Alternatively, the heirs may decide to pay off the debt to keep the house. 

Factors to Keep in Mind Before Taking Reverse Mortgage

Initial fees and other related costs:

You will incur an origination fee, closing costs, and servicing fees throughout the mortgage life. Some lenders also impose insurance premiums on the mortgage. 

In the long run, you will owe more:

The interest charged on the monthly payments will add to your loan balance, pilling up the amount you owe. 

The interest rate could change over time:

Reverse mortgage interest rate is often pegged on the financial index that changes with the market. Various loan rate in the market gives you additional options to choose from because you could compare the cheapest loan. The HECMs reverse mortgages, which tend to have a fixed interest rate, dictate that you receive your payment in lumpsum at closing.

Your loan interest is non-tax-deductible yearly:

You cannot benefit deductibles on income tax returns from the interest charged on a reverse mortgage until you fully or partially pay the loan.

The lender does not pay for other costs in your home:

Since the lender allows you to keep the house’s title, you will pay for home expenses, such as insurance premium, property taxes, maintenance, fuel, utilities, and other expenses. The lender may require loan repayment if you do not pay the necessary obligations like insurance, maintenance, and taxes.  

What your heirs remain with:

Your heirs may end up with nothing if the reverse mortgage used up all your home equity. The non-recourse clause in reverse mortgages indicates that the borrower should not owe more than the home’s value were the house be sold today. 

The Borrowing Limit on Reverse Mortgage

If you have a proprietary reverse mortgage, you will have no set limit on the amount you can borrow. Often the lenders set the restrictions and the borrowing limits. However, if you have acquired a reverse mortgage backed by the government, your borrowing will be restricted to your home’s appraised value or the set FHA maximum amount, which is $765,000.

This means that one can only borrow up to a portion of the home value, with the remaining portion used as the loan collateral and a buffer should the property’s value reduce. A person’s age also determines the credit limit and the interest rate you charge on your reverse mortgage. 

Reverse Mortgage Costs

As mentioned above, if you take a government-backed reverse mortgage, there are two charges you will have to deal with. 

Interest rates:

If you are given a lump sum payment, the interest rate would be fixed, often at 3.5% per annum, which is lower than the rate for a home equity loan product.

Insurance premiums:

Government reverse mortgages have an insurance premium; 2% of the mortgage value should be paid upfront plus a yearly premium of 0.5%. The insurance premium offer protection to the lender should the borrower default in paying taxes or maintenance.

Types of Reverse Mortgages.

 A reverse mortgage is categorized into three types as follows;

Home Equity Conversion Mortgage (HECM)

This is the most known type of reverse mortgage backed by the government. They require the borrower to provide a high upfront cost, but you can use the money for any purpose. Furthermore, you have the freedom of deciding how you will withdraw the money, either through credit lines or monthly payments.

Another feature of this mortgage is that it is only provided by lenders approved by Federal Housing Administration (FHA) for HDU-approved borrowers.

Proprietary Reverse Mortgage

A private corporation provides these mortgages. The lender is likely to award you a larger loan if your home value is higher as per market price. 

Single-Purpose Reverse Mortgages

Some local government agencies, states, and non-profit organizations provide a single-purpose mortgage, though these are found in limited locations. The borrower can use the money for only the purpose specified by the lender. For instance, the lender can dictate that the money be used for property taxes, home improvements, or repairs. 

6 Ways to Receive Money from Reverse Mortgage

Lump-sum: A lump sum allows the borrowers to receive the reverse mortgage proceeds at once at the loan’s closing. It carries a fixed interest rate, unlike the other options having variable interest rates. 

Equal Monthly Payments: This option requires that the lender make steady monthly payments to the borrower, provided the borrower uses the mortgaged house as the principal residence. 

Line of Credit: This option allows the homeowner to borrow money when they need it, charging interest on what is borrowed. 

Term Payments: Here, the lender enables the borrower to receive equal monthly payments for a duration set by the borrower.

Term Payments Plus a line of credit: Under this option, the borrower receives money from the lender in equal monthly payments for a specific period. If the borrower requires additional cash after the set term ends, they can turn to line credit.

Equal Monthly payments and line credit: This option allows the lender to give steady monthly payments, provided the borrower lives in the mortgaged home as their principal residence. Should the borrower need additional cash at any point, they can utilize their line of credit. 

Pros and Cons of Reverse Mortgages

When going for a reverse mortgage, the borrower needs to weigh the pros and cons of this type of loan and determine if it is worth the risk. 

Pros

  • It can give you cash to carter for necessary medical bills late in life
  • All costs are added to your loan balance
  • They have a competitive interest rate
  • You do not need to pay the loans out of your pocket. 

Cons

  • The loan cost can be significantly high in the long run
  • The lenders require that the loans be paid before your heirs can inherit your property
  • You need to have considerable high equity on your home, often 50% of equity, to be approved.
  • There are lots of scams you will need to avoid.
  • Most lenders of reverse mortgages require you to have mortgage insurance. 

Is Reverse Mortgage For Me?

A reverse mortgage is not for everyone due to the risk involved and the cost associated with it. It sounds like a line of credit or home equity loan as it provides borrowers with a line of credit or lump sum, depending on the extent of your mortgage payment and home market value.

This loan does not need good credit and income like you would in regular home loans. This loan is suitable for seniors who can’t qualify for home refinancing or regular home equity or who do not want to make regular monthly loan payments.

Reverse Mortgage Alternatives

Apart from acquiring a loan on your accumulated home equity, you could also consider these alternatives:

Cutting your expenses:

You can trim on some expenses to help you stay longer in your house. Minimizing expenses will increase your income, enabling you to pay your mortgage without turning to the reverse option. 

Downsizing:

You can sell the house and move to a smaller one; less expensive to help manage your finances well and gain access to the existing home equity. The proceeds from the sale can be used to pay off other debts or another house in cash.

Refinancing:

If your previous loan is not cleared, you could refinance the loan to a plan with lower monthly payments.  However, you should weigh the new loan terms and the closing cost to determine if it will impact your finances when you retire. 

Additionally, you could consider other loans such as home equity loans, borrowing against life insurance, conventional mortgage, tap savings, and home equity line of credit. 

Top 3 Reverse Mortgage Lenders

Not every lender can provide reverse mortgages. You will need to search for lenders approved by the federal government to offer this type of loan. some of the big names approved for reverse mortgage lending include:

One Reverse Mortgage

This company allows seniors who are at least 62 years to leverage their home equity. The proceed from this company can be received in a lump sum, monthly payments, or line of credit. The borrower can use the money to defray unexpected expenses, debts or as a retirement planning tool. One Reverse Mortgage is known for its outstanding customer service, offering a transparent and smooth loan process. 

It is licensed to operate in 50 states, and all its loans are federal-backed, thus highly regulated for the protection of borrowers. The company has a huge scale of operation and excellent customer service to keep it distinct from the competition. 

American Advisor Group

AAG is one of the leading providers of government-backed reverse mortgages. Their products include Home Equity Conversion Mortgages (HECMs), HECM for purchase, and HECM refinance. They customize their disbursement to suit the borrower’s needs, allowing you to choose from monthly payments, line of credit, and lump sum.

This company is suitable for those intending to downsize and relocate. They are excellent in helping customers eliminate monthly mortgage payments on the new house, thus enhancing your cash flow.

Liberty Home Equity Solutions.

This company is one of the biggest and most experienced HECM providers in the U.S., providing jumbo and conforming loan products. It boosts licensed and dedicated loan professionals to help senior citizens from 49 states acquire funding in a fast and efficient way. They have competitive pricing and flexible terms without upfront fees, thus enabling customers to save on reverse mortgages. 

Those who qualify for a reverse mortgage are not required to pay monthly payments; however, they will need to sort insurance premiums, property taxes, and maintenance. Liberty Reverse Mortgage is an excellent choice for any senior citizen who intends to eliminate recurring mortgages or build cash security.

Conclusion

A reverse mortgage can be an excellent idea for those experiencing unexpected expenses after retirement, and there is no other source of income. However, when selecting an ideal plan due diligence is required, otherwise, you could fall prey to scams.

It is also important to consider the risks involved, including using up all your accumulated equity on the house, leaving nothing for your heir. Before resorting to reverse mortgages, consider other alternatives available for you, such as downsizing, cutting on expenditure, and other forms of mortgages. 

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